There was a pretty slim chance that contract electronics manufacturer Jabil Circuit, Inc. (NYSE:JBL) would turn in a spectacular third-quarter earnings report and it wasn’t surprising when its guidance fell behind expectations once again.
Although the company did beat analysts’ estimates, it was the least that it could have done since they were already pretty low. Investors looking for some upbeat comments from management would have surely been disappointed with Jabil’s outlook, but it seems that there was a silver lining as well.
A silver lining somewhere?
Surprisingly, shares haven’t done too badly as one would ideally expect after the report was released last week. Maybe, the company’s decision to follow a restructuring plan to cut costs via layoffs is probably keeping investors optimistic (however ironic it might be), or even the few bright spots in a couple of its businesses might have provided hope to the hopeful.
But, the question is, what next for Jabil Circuit, Inc. (NYSE:JBL)? Given the fact that the stock has had a good run over the past couple of months, appreciating over 20% since mid-April, many might be thinking of exiting their long positions to book some profits.
Given the sluggish state of Jabil’s business, it might be the right thing to do. But then, a patient investor would look at the company’s relatively cheap valuation, decent dividend yield, benefits from a recent acquisition, and enticing customers, and might decide to stick with the stock. Let’s see if there is enough reason for the patient investor to stick with the stock.
A high risk/high reward business
I’ll begin with the company’s High Velocity segment, which accounted for 29% of revenue in the previous quarter and jumped 23% from the year-ago period. The reason why this segment performed this well can be found in my preview of Jabil Circuit, Inc. (NYSE:JBL)’s earnings, where I’d stated that the ramp up of Research In Motion Ltd (NASDAQ:BBRY)’s latest phones would be a tailwind for Jabil Circuit.
It indeed turned out to be the case as is evident from the segment’s results and Jabil Circuit, Inc. (NYSE:JBL) expects the momentum to continue going forward. The company is looking at a 15% jump in revenue on a year-over-year basis in the ongoing quarter from the High Velocity segment as devices running BlackBerry 10 are probably selling well.
We’ll get to know more about Research In Motion Ltd (NASDAQ:BBRY)’s sales when the company releases its earnings, but reports suggest that the BlackBerry Q10 has been doing well. Analysts have been upgrading the stock after channel checks as they believe that the strength of Q10’s sales will offset the loss in steam of the Z10. However, it remains to be seen how Research In Motion Ltd (NASDAQ:BBRY)’s handsets do in the long run so as to keep Jabil’s High Velocity business afloat.
Just last year, when BlackBerry (then Research in Motion) was in a period of transition and didn’t produce any phones, Jabil Circuit, Inc. (NYSE:JBL)’s High Velocity business wasn’t doing well. So, investors need to keep a close eye on Research In Motion Ltd (NASDAQ:BBRY) and comments over the next conference call to see if the Canadian smartphone maker has enough fuel in the tank to power Jabil’s business higher going forward.
Thus, dependency on Research In Motion Ltd (NASDAQ:BBRY) might be a good thing only if BlackBerry 10 sells well or else, Jabil Circuit, Inc. (NYSE:JBL) risks losing steam in High Velocity.
Standing solid here
Next, let’s turn our attention to the Diversified Manufacturing Services (DMS) business, which contributed 40% to revenue and has been in the spotlight for various reasons. Revenue from this segment dropped 4% from last year, but a 10% jump in Specialized Services acted as a cushion for the DMS business.
Now, it is this Specialized Services segment through which Jabil manufactures the aluminum casing for Apple Inc. (NASDAQ:AAPL)’s iPhone. Jabil Circuit, Inc. (NYSE:JBL) had manufactured the casing for the iPhone 5 last year and its margins had to take some serious dent in the process. Now, Apple is readying itself for the next iteration of the iPhone and Jabil should ideally see better revenue going forward and help arrest the decline in revenue in the overall DMS segment.