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 Basics

    Learn How to Trade Semiconductor Stocks in 4 Steps

    The enormously diverse semiconductor industry requires market players looking for exposure have specialized knowledge.
  2. Mutual Funds & ETFs

    What Exactly Are Arbitrage Mutual Funds?

    Learn about arbitrage funds and how this type of investment generates profits by taking advantage of price differentials between the cash and futures markets.
  3. Investing News

    Ferrari’s IPO: Ready to Roll or Poor Timing?

    Will Ferrari's shares move fast off the line only to sputter later?
  4. Investing News

    Why the Philippines Is the #1 Source for Tech Startups & Talent

    In the last few years, the Philippines has been working diligently to re-invent itself, and that work has paid off. The Southeast Asian nation is rapidly gaining notoriety as a leading source ...
  5. Investing News

    Austin Set to Rival Silicon Valley

    Over the years, Austin, Texas has lovingly embraced its quirky reputation with the slogan “Keep Austin Weird.” Today, the capital city is attracting several tech startups and investors, making ...
  6. Stock Analysis

    5 Cheap Dividend Stocks for a Bear Market

    Here are five stocks that pay safe dividends and should be at least somewhat resilient to a bear market.
  7. Stock Analysis

    The Biggest Risks of Investing in Amazon Stock

    Find out which risks are most important to Amazon's shareholders. Learn which operational risks impact share prices and which financial risks affect investors.
  8. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  9. Fundamental Analysis

    Use Options Data To Predict Stock Market Direction

    Options market trading data can provide important insights about the direction of stocks and the overall market. Here’s how to track it.
  10. Stock Analysis

    2 Oil Stocks to Buy Right Now (PSX,TSO)

    Can these two oil stocks buck the trend?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. 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 >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

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!