With an all-star customer list that includes most of the biggest names in technology, Jabil Circuit, Inc. (NYSE:JBL) should be performing a whole lot better than it is. Shares of Jabil are hovering right around $20, a full 27% below their 52-week high, and even further below the prices of the mid-2000’s, before the financial crisis. Since that time, Jabil’s revenues (and earnings) have risen to all-time highs, with only one year of declining revenues in the past decade (2009). With not only rising revenues, but solid earnings growth as well, why is this electronics manufacturer trading at such a low valuation?
About Jabil Circuit
Jabil Circuit, Inc. (NYSE:JBL) provides manufacturing services for many of the top electronics companies in the market including Apple Inc. (NASDAQ:AAPL), Cisco Systems, Inc. (NASDAQ:CSCO), BlackBerry, General Electric, Hewlett-Packard, and IBM, just to name a few. Some of the services the company provides are design, engineering, assembly, product testing, and more.
For Apple, who is expected to leapfrog Cisco Systems, Inc. (NASDAQ:CSCO) and BlackBerry in order to become Jabil’s top customer this year, Jabil Circuit, Inc. (NYSE:JBL) manufactures the casings for the iPhone 5. The current speculation about less than stellar supply orders from Apple Inc. (NASDAQ:AAPL) as a result of mediocre iPhone 5 sales has been one of the largest factors putting pressure on Jabil’s sales. The iPhone sales numbers are a very good indicator of the health of Jabil’s diversified manufacturing services unit, which makes up about 45% of the company’s sales and has put out disappointing results lately. On the other side of things, keeping track of an Apple supplier, such as Jabil, has become a favorite pastime of Apple enthusiasts hoping to get some clues as to how the ultra-secretive Apple is doing between quarterly reports.
Jabil Circuit, Inc. (NYSE:JBL)’s other two major segments are Enterprise & Infrastructure (29% of sales), which focuses on the computing, storage, networking, and telecom industries, and the High Velocity Systems segment (27% of sales) which provides services for manufacturers of such products as printers, displays, set-top boxes, and point-of-sale terminals. For networking giant Cisco Systems, Inc. (NASDAQ:CSCO), for example, Jabil manufactures printed circuit board assemblies (PCBAs), which Cisco credits for drastically improving its production efficiency, greatly benefitting both companies. Cisco is Jabil’s second biggest customer, accounting for more than 10% of Jabil’s sales, and Cisco’s health is also a good indicator of how Jabil is doing, and vice-versa.
Why So Cheap?
Despite its all-star client list, Jabil Circuit, Inc. (NYSE:JBL) trades at a very unoptimistic valuation of just 8.8 times the current (ending in August) fiscal year’s earnings. With a number like this, you would expect flat or declining revenues, maybe tons of debt, or dividend cuts. Instead, there is the exact opposite to be found when examining Jabil. Revenues and earnings are expected to increase nicely going forward, and 2013’s earnings of $2.29 per share are projected by the consensus of Jabil’s analysts to grow to $2.64 and $2.74 in 2014 and 2015, respectively.
The company also has almost as much cash as debt on its balance sheet, with a net debt of around $400 million, which is a very manageable amount given the company’s cash flow. Speaking of cash flow, the company pays some of it out in the form of a modest, but significant dividend yield of about 1.7% which has been raised regularly since the company began paying dividends in 2006.
One of the reasons for the cheap valuation is the perceived risk in the electronic manufacturing services industry, which historically has been very volatile and uncertain. However, Jabil Circuit, Inc. (NYSE:JBL)’s history of delivering profitability and satisfying its customers gives me peace of mind that the company will perform well going forward, especially given the constantly evolving nature of their customers’ industries.