Jabil Circuit Is Down, But Certainly Not Out

Jabil Circuit has had a disappointing year so far. The electronics manufacturing services company was recently downgraded from outperform to sector perform by RBC Capital. Also, Jabil hadn't been performing well when it reported its second-quarter results in March. Its move away from BlackBerry and the failure of Apple's plastic iPhone 5c have done the company in. Is there any relief for investors going forward?

Trying to turn around
Jabil has seen weakness in its results due to a decline in volume in its diversified manufacturing services business. In the second quarter, Jabil's revenue decreased by 14% to $3.58 billion, missing analysts' estimates of $3.61 billion. The reason behind the decline was the disengagement with BlackBerry, which was an important customer in the past.

However, Jabil is working on various aspects to get better in the future. To improve its operations, Jabil is planning to incur additional production expenses. Jabil is also making some strong moves such as implementing automation for production processes, along with various advanced engineering activities. It is hiring and training teams for direct labor and prototyping, and is repositioning manufacturing assets across the company. With these moves, Jabil is trying to improve operational efficiency.

Opportunities ahead
Jabil is seeing good opportunities in China's growing smartphone market, along with other potential markets where demand for LTE is growing. In addition, Jabil has won more than 15 new customers in its high-velocity segment. This is important for the company's long-term growth since the segment was weakened by BlackBerry's departure.

Also, Jabil might see demand from BlackBerry coming back in the future since the Canadian smartphone company is rapidly executing its turnaround plan. BlackBerry is now focused on low-cost devices, and its efforts have started bearing fruit. BlackBerry's new low-cost smartphone, the Z3, has received a solid response. The device was sold out soon after pre-orders started in the Indonesian market. This indicates that the phone should sell in good numbers in the emerging markets.

On the other hand, Jabil Circuit was also hurt due to slowing demand from Apple. As reported by the Wall Street Journal, Jabil manufactures the plastic cases for the iPhone 5c and the metal exteriors for the iPhone 5s. However, the iPhone 5c failed to take off and Jabil's business declined. But this year, since Apple is expected to launch two iPhones with big screens, Jabil can expect a boost in the business. A bigger iPhone would need higher metal content on the exteriors, thus expanding Jabil's market.

Jabil is also diversifying into other areas. Its Nypro health care team has landed new design wins at marquee customers in the areas of food and beverage, as well as consumer packaging. This will help the company diversify its product portfolio and deliver better performance in the future. Further, Jabil has announced the launch of two new factories in its Nypro division. These factories will support growth in the health care and packaging sectors.

Bottom line
Jabil is cheap at a trailing P/E of 14. On a forward P/E basis, Jabil is even cheaper at a P/E ratio of 10. The company is expecting a turnaround in its business and it has the necessary clients to fall back on, so Jabil may be a good investment at its current valuation. Also, Jabil has a dividend yield of 1.80%, so investors have one more reason to invest in the stock. But, an investment in Jabil requires patience, so investors should consider buying and holding this stock for the long haul.

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The article Jabil Circuit Is Down, But Certainly Not Out originally appeared on Fool.com.

Prabhat Sandheliya has no position in any stocks mentioned. The Motley Fool recommends Apple. 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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