Jabil Circuit, Inc. (NYSE: JBL – $25.72), headquartered in St. Petersburg, Florida, is a supplier of turnkey manufacturing services for circuit board assemblies and systems to manufacturers in the personal computer, computer peripherals, communications and automotive industries. The Electronics Manufacturing business (60% of fiscal 2015 revenue, 44% of profits) assembles products for customers in various technology and telecommunication industries, as well as automotive, home automation, industrial, energy and retail end-markets. As a cautionary note, Jabil Circuit depends on a small number of customers for a significant percentage of revenue, with five customers accounting for 50% of sales. Its top customer is Apple, Inc. (24% of revenue) followed by Cisco Systems, LM Ericsson, General Electric, NetApp, Sony Mobile Communications and Zebra Technologies. The Diversified Manufacturing Segment (40% of sales, 56% of profits) focuses on manufacturing services and works with customers to develop and produce products for consumer lifestyles and wearable technologies, defense and aerospace, healthcare, mobility and packaging. The company also provides design engineering, supply chain and logistic services and fulfillment and distribution for its customers.
In September, the company projected 33% revenue growth for the more profitable Diversified Manufacturing Segment and flat sales for Electronics Manufacturing. Those growth numbers would vault DMS to nearly 50% of company revenue in the coming year, up from 30% of revenue in fiscal 2013. In the year ended August, Jabil grew sales 14% to $17.7 billion, while operating cash flow more than doubled and per-share profits more than quadrupled, albeit from a weak fiscal 2014. While I believe such elevated growth is unsustainable, Jabil’s broad business mix and expansion into new markets should keep profits rising. The consensus on the Street projects per-share profit growth of 26% over the next 12 months, tops among electronics manufacturers and more than three times the industry average. Since Jabil exceeded the August-quarter per-share-profit estimate by 18%, analysts’ targets for both fiscal 2016 ending August and fiscal 2017 have increased roughly 8% to $2.57 per share and $2.80, respectively. Even better, aggressive-minded investors can buy that growth at a deep discount. At 10 times fiscal 2016 estimated earnings, Jabil trades 30% below the average contract electronics manufacturer in the S&P 1500 Index, and well below its historical average of 18. Another driver of profit growth is rising margins. Operating profit margins reached 6.2% in the 12 months ended August, up from 5.1% a year ago and 3.9% six years ago. Credit fast growth by the higher-margin DMS unit as well as aggressive cost controls. Jabil has run profit margins above 11% at times in the past, suggesting the company can keep improving. The balance sheet is sound and JBL carries a reasonable $1.2 billion in long-term debt, down from $1.7 billion at the end of 2014. Deployment of strong cash flow is expected to reduce that figure to $850 million by late decade. Hence, the small annual dividend of $0.38 per share is unlikely to grow much over the next few years.
I believe investments in the company’s global capacity expansion efforts should position it for continued top and bottom-line growth in 2016 and beyond. Recently, Jabil signed a memorandum of understanding to support its intentions of extending services for its customer global footprint in the greater Asia region. In particular, the company is slated to open a new facility in Vietnam to focus on production of various high-tech manufacturing sectors and in Malaysia to concentrate on production for the medical, industrial and aerospace markets. I am initiating Jabil Circuit with an 8% allocation.