Jabil Circuit, Inc. (NYSE: JBL) is holding its analyst day on Oct. 30 in Boston followed by an afternoon event in Clinton where investors will get to see Nypro's facilities first hand.
Based in St. Petersburg, Florida, Jabil Circuit is the third-largest provider of electronic manufacturing services (EMS) to global OEMs. The company's principal markets include computing and storage, networking, telecommunications, mobility, industrial, medical, mobility, and consumer electronics.
Jabil has historically been a top performer in the EMS space. The company is currently above peak operating margins and has seen considerable growth over the past few quarters.
Subsequent to Jabil's most recently reported results, a number of EMS peers have reported, suggesting a more muted outlook for the December.
"We believe this could suggest a modest cut to guidance, although we expect F1Q-14 guidance was overly conservative to account for BBRY uncertainty," Deutsche Bank analyst Sherri Scribner wrote in a note to clients.
Jabil's near-term challenge is navigating its exposure to BlackBerry Ltd. (NASDAQ: BBRY), a 12 percent customer in fiscal 2013. Jabil is expected to disengage with Blackberry as it has been decreasing its production of BlackBerry handsets and is likely to end its relationship with BlackBerry as soon as practicable.
At its analyst day, the company is expected to provide an update on current demand trends and a preliminary fiscal 2014 outlook which factors in the Nypro acquisition, as well as the impact of the BlackBerry business.
Outside of BlackBerry, Apple, Inc. (NASDAQ:AAPL) has grown to 19 percent of sales, an exposure that it would also need to manage gradually. Nypro's addition bolsters Jabil's HC business while also expanding into packaged goods serving brands like P&G, Clorox, Coke.
More detail on restructuring actions following probable BlackBerry disengagement is expected at the event. In fact, a major topic of discussion during Jabil's fo! urth quarter 2013 call was the company's possible disengagement from BlackBerry given the uncertain revenue outlook.
In anticipation of lower-than-expected sales from BlackBerry, Jabil suggested it would take additional restructuring actions in the range of $35 million to $85 million, aimed at resizing the HVS segment.
"Given the decision was in the early stages of discussion at the time of JBL's F4Q-13 earnings call, we would expect more detail on JBL's plans with BBRY and for its underutilized equipment, as well as the margin impact of a possible disengagement over the next few quarters," Scribner said.
Meanwhile, Jabil may provide additional information on its fiscal 2014 outlook as well as more detail on Nypro, which represented $1 billion of fiscal 2013 revenue. As is typical, management should provide an update on its long-term outlook for its business, including growth expectations given the probable loss of Blackberry, which accounted for $2.2 billion in revenue in fiscal 2013.
Margins will be another area of focus, given the different moving parts. On its fourth quarter call, Jabil updated its fiscal 2014 EPS expectations to be roughly $2.48 (down from $2.77), and the Street would expect further detail on strategies over how the company reaches that goal.
"The impact of Nypro in particular will be a focus, and we would expect an update and more detail on when Nypro will become accretive to JBL's margins in FY-14, including when DMS margins return to target ranges of 5.5-7.0%," Scribner said.
Moreover, the company may be asked over the operating margin leverage, which may offset positive trends of improved margins and potential return of growth rates to more normal levels over the next year. In future quarters, the market sees more difficult revenue growth in some of its segments and the same concerns would be shared with the company at the event.
"In contrast to his predecessor, we believe new CEO Mondello will likely place a greater emphasis on growth ! and ROIC,! rather than specifically on margins. We see M&A playing a greater role complementing existing markets, technologies, and increasing Jabil's value-add with key customers," UBS analyst Amitabh Passi said in a client note.
In this scenario, the right strategy is to diversify further into non-technology markets with longer design and product cycles, especially in healthcare, industrial, A&D, and packaged goods.
JBL shares, which trade times its 2014 consensus estimate, have gained 30 percent in the last year,. Given near-term uncertainties with BlackBerry, the stock likely remains in a holding pattern for the next quarter or two until there is greater clarity on how the BlackBerry situation ges resolved.
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