For a couple of quarters now, I've thought that Jabil Circuit (NYSE:JBL) looked undervalued on a long-term basis, but that the trends in the electronic manufacturing services (EMS) industry were likely to keep the stock stuck. To that end, the shares are down about 1% for the year, even though the company's business with Apple (Nasdaq:AAPL) seems to be ramping up well. I continue to believe that Jabil's current price understates its long-term value, but I also believe that getting the timing right on when to buy this stock could be tricky given the ongoing malaise across so much of consumer and tech hardware.

Guide To Oil And Gas Plays: We've got your comprehensive guide to oil and gas shales in North America.

A Good Start to the Fiscal Year
Jabil has started fiscal 2013 off to a good start with a quarter that was solidly ahead of analyst expectations on both the top and bottom lines, though management's guidance for the next quarter was not quite as robust.

Revenue rose 5% this quarter, though with a lot of moving parts. Diversified manufacturing service (DMS) revenue rose 20%, with specialized services up 51% while healthcare dropped 22% and industrial/clean-tech was down 9%. Unfortunately, the company doesn't give (or isn't able to give) much customer-specific data, so it's hard to say how much Apple had to do with this result. Looking at the other businesses, enterprise/infrastructure was up 17%, while high velocity (which includes a lot of handset business) was down another 20%.

Margins were iffy; not so bad relative to expectations but not great on their own. Gross margin picked up slightly from the fiscal fourth quarter, but declined about 30 basis points from last year. Operating income fell 1% on an adjusted, and the company saw some margin erosion at the operating line. Although margin in DMS improved significantly on a sequential basis (due, I believe, to the company ramping up that Apple business), high velocity margins declined by a matching amount.

SEE: How To Decode A Company's Earnings Report

Still a Ways from "All Clear"
While I have my doubts that Jabil will succeed over the long-term in differentiating itself from the likes of Flextronics (Nasdaq:FLEX), Benchmark Electronics (NYSE:BHE) or Plexus (Nasdaq:PLXS) and posting significantly better margins, that's not the issue today.

The issue today concerns the outlook for demand for the things Jabil builds/assembles for others. While Cisco (Nasdaq:CSCO) was relatively optimistic on its last call and Apple continues to see solid demand, the PC and consumer electronics markets are still pretty soft. Likewise, enterprise hardware demand is looking soft, as many OEMs have expressed caution on demand in networking, storage, and other segments.

Sooner or later the rebound will come. Companies like IBM (NYSE:IBM) aren't talking about a multi-year trough, but rather just a few difficult quarters. Likewise, carrier spending has to improve at some point, even if it's just to roll out 100G products. When that comes, I expect Jabil (and the EMS sector) will be in good shape to thrive from both a revenue and margin perspective.

SEE: A Primer On Investing In The Tech Industry

The Bottom Line
Long-term cash flow modeling for Jabil is tricky, given that the company has never been able to post consistent free cash flow margins. Likewise, pinpointing a good time to buy is tricky as the market is likely going to buy the stock ahead of confirmation of better orders and sales at its OEM customers.

That said, I do believe Jabil can support a fair value in the mid-$20s on the basis of its revenue and free cash flow prospects. That's enough undervaluation to make this stock worth further exploration today, though I will again caution investors that this stock could be pretty much dead money for a few quarters (or more) if that recovery in consumer electronics and enterprise hardware takes longer to materialize.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

Related Articles
  1. Investing

    The Rise of Corporate Venture Capital

    After the success of Google Ventures, corporate venture capital is an increasingly popular diversification and hedging tool for many large corporations.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Investing

    What’s Plaguing Twitter and Yelp?

    Yelp and Twitter have recently become grounded in reality and unable to justify their sky-high stock valuations.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!