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Tickers in this Article: JBL, FLEX, SANM, CSCO, RIMM, APH, TYC
Jabil Circuits (NYSE:JBL) is a very nice property in a really rough neighborhood. Unfortunately, being among the best electronics manufacturing services provider is a little like being the tallest Oompa Loompa - it is nice on a relative basis, but not so impressive outside its own industry. The fact is, the EMS industry is brutally competitive and price sensitive, and it is difficult to see how Jabil can sustain enough of an economic advantage to allow the stock to really do well over the long haul.

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A Solid Quarter To Start The Fiscal Year
Jabil does deserve credit for producing solid results in this first fiscal quarter. Revenue rose 32% from last year and 6% on a sequential basis. As investors might imagine, the performance of a company like Jabil is always going to fall somewhere between that of its best-performing customers (like Research In Motion (Nasdaq:RIMM)) and its lagging customers (like Cisco (Nasdaq:CSCO)).

Diving a little deeper, revenue growth was strongest in the high-velocity systems business, which serves customers like RIMM, Hewlett-Packard (NYSE:HPQ) and Nokia (NYSE:NOK). Growth was also quite strong in the diversified manufacturing services segment (which serves customers like Tyco (NYSE:TYC)), where the "specialized" business more than made up for lagging performance in industrial/clean-tech and healthcare/instrumentation. Enterprise and infrastructure, which includes Cisco, was the laggard this time around.

Jabil management also deserves some praise for its profitability. Gross margin rose 10 basis points from the year-ago level to 7.6%, while GAAP operating margin reached a multi-year high at 3.8%. That, by the way, is part of the problem with Jabil - when 4% is an outstanding operating margin, that is a very tough business indeed.

The Road Ahead
Jabil gave pretty encouraging guidance for the next quarter, telling analysts and investors that revenue should come in about $200 million higher than previously expected and earnings per share should be about 16% higher than prior estimates. (For related reading, see Can Earnings Guidance Accurately Predict The Future?)

That should not only be enough to give the stock some support, but it should be a relief to tech hardware investors in general. Every EMS company has its own roster of business. Apple (Nasdaq:AAPL), for instance, does a lot of business with Hon Hai. What is good for Jabil is probably going to be good for Flextronics (Nasdaq:FLEX) or Sanmina (Nasdaq:SANM), and what's good for those two is going to be a reflection of broader positive conditions for Apple, Cisco, Dell (Nasdaq:DELL), EMC (NYSE:EMC), Hewlett-Packard and the whole range of hardware companies.

The real question for Jabil, though, is whether the company can find a way to produce sustainably higher margins. The company is doing a lot of the right things by trying to expand into healthcare and clean-tech, as well as developing differentiated services and squeezing costs out of the system. The trouble is that every other major competitor is likely to follow and compete away Jabil's margin leverage. In other words, it is difficult to see a clean path to sustainably higher margins and cash flow production.

The Bottom Line
Jabil is not necessarily overpriced, but it is hard to see a strong thesis for buying the stock as anything more than a secular trade. To that end, then, connector companies like Amphenol (NYSE:APH) or Tyco could be just as interesting as trades. As a long-term investment, though, Jabil just does not seem to stack up. It is a fine stock to trade on the peak/trough moves in tech spending, but low-to-mid single-digit operating margins and even lower free cash flow margins make this one a difficult choice for long-term investors.

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