Sunday, March 30, 2008

jbl: one to watch - but wait to buy

guidance from contract manufacturing services provider jbl was a disappointment, offset not by much, it would seem, by the fact that latest-quarter results bested expectations. the stock took a dive, pushing their recent close nearly two-thirds below the 52-week high. demand is slowing in many of the markets the company serves. but the company has started to make progress in shoring up profitability, which suffered as it ramped several new products and suffered the effects of challenging pricing environments and weaker sales in mobility (wireless). and there is a sense that top-line growth will resume once we wade through most of this macroeconomic muck.

in the ems division, which accounted for two-thirds of the fiscal Q2 revenue total of $3.1 billion, top-line growth was 2%. the ems unit focuses on large customers that sell into commercial markets and that want a partner with broad technology expertise. in the latest quarter, work in the automotive sector fell 13% sequentially, while industrial, instrumentation and medical sector sales fell 3%. offsetting those declines, computing and storage sales were up a percentage point from Q1, while networking sales rose 2% and telecommunications sales were up by 26%, as the company recorded its first full quarter of revenue from a newer relationship with nokia siemens networks.

turning to the consumer division, comprising 29% of fiscal Q2 sales, seasonality hit the top line, resulting in a 29% quarter-over-quarter decline. in consumer, jbl works with customers that look for focused technological capabilities.

the remainder of the company's overall sales came from aftermarket services, which provides logistic and repair solutions.

adjusted earnings in the quarter were $0.20 per share, two pennies better than consensus then showing on reuters estimates.

but before investors could applaud the beat, management offered a dire outlook for the current quarter and the remainder of the year. revenue expectations for the second half are now 7% below the prior range, as the company expects the weakening economy to impact sales, though no customer or market share losses are to be blamed.

telecom and display have been the worst performers - with news of the former also dragging down shares of csco, a major customer - while computing and storage, in addition to the aftermarket services unit, have seen positive gains abroad. as was the case last quarter, slowing top-line growth also will pressure margins, which had improved 170 basis points to 3.6% from fiscal Q2 2007 to fiscal Q1 2008.

new business activity has been good, though, with new customer wins in telecom, medical, mobility and industrial representing another $750 million in annual revenue. and the company remains in stable enough financial condition to weather the economic downturn.

investors seem to be betting otherwise. yet, with the shares now so far off their 52-week high, the stock is now trading at a forward P/E of 11.2, which is among the lowest it's seen since 2002. growth, obviously, is slowing in the near-term, but i like that the company hasn't seen major share losses and instead can blame the decline on the economy, a trend from which it can recover relatively more easily. longer term, i continue to believe that major producers of components and devices will continue to outsource production expertise to ems players like jbl, while keeping the design tasks in-house.

i think this stock can eventually trade to the mid 20s. however, i would wait for either a clearer outlook or possibly more declines in the shares. if the shares traded down to the 7 range, on no news, i would buy it there. i'd wait for now.

disclosure: do your own DD; looking, but not buying yet

No comments: