2 Reasons Why This Tech Stock Looks Like a Buy
When Goldman SachsupgradedJabil Circuit to a "Conviction Buy," it knew exactly where it was putting its money. When Jabil released its second-quarter results last week, it issued a strong outlook for the next fiscal year that vindicated Goldman's stand. Jabil is no longer in the shadow of BlackBerry, since it has scaled down its relationship with the struggling smartphone maker. Looking forward, Jabil's as position an Apple supplier and opportunities in the enterprise and infrastructure business through Cisco Systems are key catalysts.
The contract electronics manufacturer expects earnings of $1.65 to $1.95 per share in fiscal 2015, well ahead of the $1.63 Wall Street estimate. Such an optimistic estimate is being driven by positive trends across Jabil's business, especially enterprise and diversified manufacturing.
Enterprise to drive growth
With 34% of total revenue, the enterprise and infrastructure business is a key driver of earnings and share price growth for Jabil. Although it is seeing choppiness in the enterprise spending by corporations and the federal government, the roll out of LTE should make things better. But, on a broader scale, enterprise spending is slated to grow this year by 4%, driven by servers, storage, and enterprise networks. In comparison, this industry grew just 1% last year, according to IDC.
Moreover, the deployment of long-term evolution, or LTE, networks is running at a better rate this year as operators are expected to deploy the service to cover more customers. Carriers in China, Europe, and the U.S. are leading the charge in LTE roll-out, creating more demand for Jabil's services. Hence, despite slight weakness, the overall prospects are looking good for Jabil in this business.
In addition, having a key client such as Cisco is another tailwind for Jabil. Although Cisco doesn't look like a growth driver due to its choppy performance, its long-term prospects shouldn't be ignored. Cisco's network equipment sales growth has taken a beating, but the Internet of Things could pull the networking giant out of its slump.
Cisco projects that the Internet of Things will grow into a $19 trillion industry by 2020 with 50 billion objects online. The Internet of Things will lead to higher demand for networking gear as more devices come online, and Cisco is using this opportunity to sell more equipment, along with software and services. Cisco's contribution to Jabil's top line has dropped from 13% in fiscal 2011 to less than 10% last year. But, there's a possibility that this number going will rise as Cisco's fortunes revive.
Apple strengthens DMS prospects
The diversified manufacturing services, or DMS, business is the biggest, and probably the most important, segment of Jabil as far as growth prospects are concerned. It is this segment that caters to demand from Apple, and so, it wasn't surprising when management remarked that product ramps are expected during the second half of the year.
Jabil manufactures the plastic casing for the iPhone 5c and the metal exteriors of the iPhone 5s. While slow demand for the iPhone 5c has been a drag on Jabil's performance, the product pipeline of Apple could once again provide a boost to the DMS business. The rumored development of bigger iPhones and an iWatch might help Apple increase its addressable market. A bigger sized iPhone can lure customers in the emerging markets and in Asia, while the iWatch will add a new product line and lead to more business for Apple suppliers.
With 43% of total revenue, DMS is a big factor behind Jabil's outperformance, and the prospects look promising. Apple has grown from being a sub 10% customer in 2011 to 19% of Jabil's revenue in fiscal 2013, with the possibility it could increase in the future.
The bottom line
Investors should also consider that Jabil pays a dividend of 1.80% and has a payout ratio of just 26%. Further, it trades at a cheap 10 times forward earnings and has good growth possibilities. All in all, Jabil Circuit is a stock worth looking into given its cheap valuation and prospects.
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The article 2 Reasons Why This Tech Stock Looks Like a Buy originally appeared on Fool.com.Harsh Chauhan has no position in any stocks mentioned. The Motley Fool recommends Apple and Cisco Systems. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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