Tickers in this Article: JBL, CSCO, RIMM, BSX, JNJ, FLEX, CLS
There is a certain cyclical rhythm in the electronics manufacturing services (EMS) space. Orders are cut in the bad times and clients will in-source manufacturing to boost their own utilization rates. Then, as things get better, the cycle reverses and EMS companies once again see more business. As this process unfolds, revenue rises, margins improve and estimates move higher. Last and not least, even the EMS companies come up against capacity constraints, the industry peaks, and the whole cycle starts anew.

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Every cyclical industry has periods where the stocks tend to outperform, and investors can do well if they time their buys and sells appropriately. Turning to Jabil Circuit (NYSE:JBL), then, the question is whether there is still reason to hope for improvement and more momentum in the story.

A Fine Second Quarter
Although there have been some growth concerns around major Jabil clients like Cisco (Nasdaq:CSCO) and Research In Motion (Nasdaq:RIMM), Jabil nevertheless produced a respectable quarter. Revenue grew 31% from last year and surpassed the average analyst estimate.

Below the top line, Jabil delivered some of the results that an investor would expect in that more favorable back half of the EMS cycle. Gross margin was only slightly better than in the year-ago period, but the company wrung very solid leverage out of its SG&A spending, which fueled growth in adjusted operating income of 76% (or 69% in GAAP operating income).

Looking at the Road Ahead
One of the biggest questions for Jabil is whether or not the company has basically maxed out its margin leverage for this cycle. On the negative side, growth seems to be petering out in some of the large tech names like Cisco, Hewlett-Packard (NYSE:HPQ) and Dell (Nasdaq:DELL).

On the other hand, Jabil is pushing hard to move its EMS business into relatively under-penetrated sectors like healthcare and so-called "clean technology" products - areas that heretofore were either small industries or industries that did not avail themselves of manufacturing outsourcing. Certainly there is potential here - the manufacturing and assembly of devices is a large market and manufacturing issues at companies like Boston Scientific (NYSE:BSX) and Johnson & Johnson (NYSE:JNJ) could be seen as arguments for outsourcing those operations to dedicated manufacturing companies.

That said, talk about the large outsourcing opportunity in healthcare and next-generation energy was a big talking point in 2010, 2005, 2000, and on back. In other words, this is an opportunity with a bright future in its past, but one that just hasn't come to pass yet.

The Bottom Line
Shares of Jabil, as well as other major EMS companies like Flextronics (Nasdaq:FLEX) and Celestica (NYSE:CLS) have come down pretty significantly in only the last few months. That stands in contrast to generally positive analyst sentiment and ongoing growth in the tech sector (outside of those aforementioned growth worries with a few large tech companies).

Perhaps that makes these shares a bargain. On the other hand, those inclined to technical analysis will notice a troubling trend in JBL shares since its peak in 2000, and even fundamental investors have to pause at the long history of relatively unimpressive returns on capital and the difficulties the company has had in producing sustained margin growth. Maybe this time will be different, or maybe there is simply more juice left in this positive cycle, but it is hard to argue that these shares merit a long-term engagement. (For more, see The Value Investor's Handbook.)


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