Jabil Circuit (NYSE:JBL) is trying to convince investors that even in 2016 it is a growth story. However, investors respond by saying this is not the 90s or even 2007 anymore. Now, it is even harder to convince investors that it is a growth story, while it is lowering its guidance.
Jabil is a supply chain management company. It started as a printed circuit board manufacturer. In the 90s, as PCs and networking exploded, Jabil grew. While most engineers associate Jabil with PCB, nowadays, investors associate Jabil with Apple (NASDAQ:AAPL). Through acquisitions, it has diversified its clientele and now serves over 250 brands, which include Apple, Google, and HP (NYSE:HPQ). It operates in two segments: Electronic manufacturing segment (EMS) and Diversified material segment (DMS).
The company's EMS segment contributed to 60% of its total revenue in 2016. It is a matured, low margin business. The company expects 0 – 5% growth in this segment. The company serves networking, storage, automotive industries under this segment and has customers like Cisco (NASDAQ:CSCO), HP. Thanks to more electronics in the car, automotive space is creating a bright spot for Jabil's EMS business.
The diversified material segment is a higher margin business and until last quarter, it was growing by double-digit. Under this segment, Jabil focuses on material science. It doesn’t produce finished products, rather it makes components. If you are happy that you don’t have to worry about water splash on your Fitbit or your workout clothes can adapt to your body movement, then you need to thank Jabil for that. Its largest customer is Apple. If you are wondering, it is not assembling your iPhone or iWatch for that matter. However, it is making plastics, glasses which provide that cool look for your iPhone. Under this segment, the company also serves health care, consumer lifestyle and wearable technology market.
Historically the company’s operating margin is below 3%. However, for the long term it is aiming for 5% operating margin. As it is growing its higher margin business, it expects to generate the majority of the revenue from higher margin business. However, the competition is increasing in health care segment. So, that is yet to be seen.
| 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | |
|---|---|---|---|---|---|---|---|---|
| Revenue (in millions) | 12,780 | 11,685 | 13,409 | 16,519 | 16,141 | 17,249 | 15,762 | 17,899 |
| EPS | 0.63 | (5.63) | 0.78 | 1.73 | 1.57 | 1.54 | 1.19 | 1.50 |
| Revenue Growth | 4% | (9%) | 15% | 23% | (2%) | 7% | (9%) | 14% |
| Operating Margin | 2% | (8%) | 2% | 4% | 3% | 3% | 1% | 3% |
| Debt to Asset | 19% | 23% | 19% | 17% | 21% | 21% | 20% | 17% |
| FCF % Sale | 0.58% | 2.27% | 0.22% | 2.23% | 0.85% | 2.77% | (0.79%) | 1.43% |
In spite of generating 24% of its revenue from one customer, the company is diversified. It serves many end markets. Healthcare industry is transforming. Whether it is Fitbit or some other wearable technology becomes a must wear, Jabil gets benefited.
It is a well-managed company and has a strong balance sheet.
The biggest weakness is it is cyclical. If the recession hits, everyone might buy Fitbit to measure their heartbeat to monitor stress level, but Jabil will experience a slowdown.
Having one large customer is beneficial in many ways and if that large customer is Apple, all the better. But if the largest customer experience challenges, that will spill over to Jabil.
Over the years, it has diversified through acquisitions. Acquisition generally increases goodwill, especially in the technology sector. If there is a slowdown, it needs to write-down goodwill impairment the way it has done in the past.
In last few years, the company has experienced double-digit growth. The company expanded its production capacity to accommodate its double-digit growth. So in the past few years, it has substantially increased its cap ex. Investors seem to be concerned that it might be expanding its production capacity, just to accommodate its largest customer and smartphone market is getting saturated. The management has repeatedly mentioned that it is not expanding its production capacity just to accommodate its largest customer, but it is diversifying its end markets. If China’s troubles spill over, that expansion can be a problem.
On the surface it might be looking like history is repeating itself. However, the company has diversified. The buzzword might be Software defined network, but the software needs to run on hardware. It is a well-managed company which is celebrating its 50th year. It seems to foster innovation and creativity. If you are not worried about the short-term volatilities, it is worth considering for the long term.
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