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Apple Inc. (AAPL), Jabil Circuit, Inc. (JBL): A Cheap Semiconductor Stock That You Shouldn’t Miss

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I had thought that contracts electronics manufacturer Jabil Circuit, Inc. (NYSE:JBL) would start getting better after signing off 2012 on a high, but the company’s latest quarterly report put paid to those hopes, handsomely. Jabil missed consensus estimates on the bottom line, and issued a pretty weak guidance for the ongoing quarter.

Apple Inc. (AAPL)

Jabil expects adjusted earnings of $0.50 to $0.58 per share on revenue of $4.3 billion to $4.5 billion. These significantly lag consensus estimates, which expected the company to earn $0.61 per share on $4.53 billion revenue. Hence, it was not surprising that Jabil Circuit, Inc. (NYSE:JBL) shares traded 4.5% down in late trading after releasing results. Again, it won’t be surprising if Jabil shares fall further, but this is where the opportunity lies.

In my previous post on Jabil, I’d stated that investors should be ready to endure some tough times if they are to profit from the stock in the long run. But, the best part about such times is that investors can get the stock for cheap, which is the case right now. At a trailing P/E of just 10, Jabil Circuit, Inc. (NYSE:JBL) might make for a good investment since its long-term prospects appear to be strong.

Two on song

Two of the company’s major businesses — Diversified Manufacturing Services (DMS) and Enterprise & Infrastructure — are going quite strong. These together constitute almost 80% of Jabil’s top line, and are the primary reason why I’m bullish about the company as a whole.

Specialized Services, which forms a part of DMS, continued its strong run in the previous quarter. Jabil makes aluminum casing for the Apple Inc. (NASDAQ:AAPL) iPhone, which, apart from being a revenue driver, is the reason why the company has had to suffer bottom line challenges. However, the company is working towards relieving the pressure on its margins by making investments in order to boost capacity.

Jabil had to manufacture the casings for the iPhone 5 in a hurried manner, but wants to be well-positioned when the next iPhone comes around. Thus, it doesn’t come as a surprise that the company is putting in its best effort in order to satisfy demand from Apple Inc. (NASDAQ:AAPL). This might be the reason why Jabil is speeding up the process of acquiring Nypro, a manufacturer of precision plastic products used in healthcare, packaging and consumer electronics.

The acquisition is happening earlier than expected, probably because Jabil doesn’t want to miss out if Apple Inc. (NASDAQ:AAPL) launches a cheaper, plastic-based iPhone. Rumors suggest that the cheaper version of the iPhone would have a plastic case mixed with glass fiber, according to KGI Securities analyst Ming-Chi Kuo. Thus, the haste with which Jabil is acquiring a company which specializes in making precision plastic products does make sense if Apple Inc. (NASDAQ:AAPL) is indeed going to come out with a cheaper phone.

However, even if we eliminate the talk about a cheaper iPhone, the acquisition would surely strengthen Jabil’s position. Nypro’s annual revenue is more than $1 billion, and its operations are spread across 10 nations. The company’s expertise will be a good fit for Jabil’s businesses.

Jabil Circuit, Inc. (NYSE:JBL) is expecting its Diversified Manufacturing Services to decline 10% in the current quarter due to “multiple product transitions.” However, growth is expected to be back on track in the next quarter as orders for next generation devices start flowing in.

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