This Apple and Cisco Supplier Is Primed for Further Gains
As expected, contract-electronics manufacturer Jabil Circuit released robust third-quarter results. The company handsomely beat consensus estimates and issued a strong guidance, indicating that it is firmly on track to benefit from Apple's upcoming iPhone. Jabil also stated that it is gaining traction in the enterprise and infrastructure markets, despite a challenging environment, driven by its high-quality solutions and key clients such as CiscoSystems .
The company seems well-positioned to continue outperforming the broader market going forward. Although its earnings guidance for the current quarter was a hair below consensus estimates, it can be considered as a blessing in disguise. Moreover, Jabil's fiscal 2015 outlook, which is a better indicator of the company's long-term performance, is well ahead of expectations.
All in all, the signs are positive for Jabil, and the company looks like a solid investment thanks to some key factors.
iPhone 6 prospects looking increasingly strong
After manufacturing casings for the iPhone 5 in 2012, Jabil won the contract to supply the plastic casing for the iPhone 5c and the metal exteriors of the iPhone 5s last year. Now, it looks like Jabil is set to extend its relationship with Apple.
The diversified manufacturing segment, or DMS, which accounts for 43% of overall revenue, is about to gain solid momentum, according to management. Jabil serves Apple through this division, so it isn't surprising to see why a major product ramp is expected in this segment.
As reported by CNET, machine tool manufacturers and component suppliers in China are seeing brisk business, as the next iPhone is in mass production. In fact, machine tool orders in China are up 7.5 times from the year-ago period. In addition, Japan-based manufacturers are seeing strong demand for iPhone-related parts, including optical image stabilization-related components and ceramic capacitors.
If Apple holds to its schedule, the iPhone launch is still three months away, but Apple has been aggressive on the manufacturing front to avoid supply chain constraints. Cupertino is expected to manufacture a massive 80 million iPhone 6 units this year, which is why Jabil expects solid performance from DMS in the second half of the year.
The company has invested aggressively in infrastructure to satisfy demand from Apple, incurring "additional upfront production expenses" earlier this year. It has enhanced its design services to improve the consumer experience, upgrading the interface with product packaging and product-specific industrial designs.
Additionally, Jabil might also benefit from Apple's rumored smart watch. The company is diversifying its reach into other areas of the DMS, including wearable computing. Management says that it is expecting a production ramp in wearable devices going forward, and if this turns out to be true, Jabil will benefit from the fast-growing smart watch market.
Enterprise will get better
Driven by cutting-edge products and growth in cloud-based applications, Jabil expects its enterprise and infrastructure business to improve going forward. Although the segment is expected to see some short-term pains due to a decline in enterprise spending, long-term prospects remain strong.
Having a client like Cisco certainly helps, as Jabil can expect to benefit from growth in the Internet of Things, which is expected to result in a data boom that will require more networking equipment. Cisco believes there will be 50 billion connected objects by the end of the decade, leading to demand for networking gear to support increasing streams of data.
Cisco management has said that the Internet of Things is a $19 trillion opportunity, and commissioned a separate group to focus on this concept last year. Since it is a 10%-plus customer of Jabil, it is natural for the contract-electronics manufacturer to expect growth due to cloud-based solutions going forward.
Finally, Jabil's strong prospects are backed by a decent valuation. The stock trades at 16 times last year earnings, cheaper than the industry average of almost 19. Its forward P/E of just 11.7 indicates earnings growth in the future, while a dividend yield of 1.6% makes the stock even more attractive. Overall, Jabil looks like a solid pick, and there's no reason why the company can't sustain its current momentum.
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The article This Apple and Cisco Supplier Is Primed for Further Gains 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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