Though corporate changeovers are rare in the stock market, they are not impossible. The Street, nonetheless, will bet the odds that attempts will fail more than they succeed, regardless of how strong a company’s management team may be. I can’t fault investors for being skeptical, because for every successful conversion like International Business Machines Corp. (NYSE:IBM), there are also those that can never seem to get it right (Hewlett-Packard Company (NYSE:HPQ) falls in this category).
Consequently, the Street is not ready to price Jabil in a manner that suggests that management can either turn Jabil’s fortunes around or that efforts at diversification will be meaningful enough to offset long-term share erosion. While these are valid concerns, I wouldn’t count this company out just yet. But Jabil Circuit, Inc. (NYSE:JBL) needs to do much better than what it posted in the second-quarter.
Sending the wrong signals
When a company like Jabil is going through periods of transition, the sequential comparisons tend to stand out even more. As noted, Jabil is already strong in electronic manufacturing. But management is pushing hard to get into diversified manufacturing services, or DMS. Unfortunately, Jabil sent the wrong signals to investors and the stock got punished.
First, overall revenue arrived at $4.4 billion, representing a 4% increase year over year. But revenue also declined 4% sequentially from $4.6 million in Q1. Meanwhile, the DMS business, which grew 20% last quarter, decelerated to just 11% growth. This had been Jabil Circuit, Inc. (NYSE:JBL)’s fastest-growing segment and comprised 47% of the company’s overall sales.
So, while the Street was willing to give Jabil the benefit of the doubt in the last quarter, it’s tough to feel good about the company’s progression. Granted, the macro environment continues to be tough. And I’m willing to concede that the transition to DMS still deserves more time.
What’s more, Jabil posted 15% decline in the high velocity segment, which continues to struggle after a 20% decline in the first quarter. There was a point when I thought Jabil Circuit, Inc. (NYSE:JBL) looked undervalued. After these results, I can’t make this same claim today.
Should we look beyond this quarter?
Aside from the disappointing results, management gave no indication that things will improve, as far as guidance is concerned. Overall revenue is expected to decline 2% for the third quarter. But after that, things were left to speculation. The company expects DMS and the enterprise segment to remain “consistent.” In other words, take your best guess. Absent a solid forecast, this tells me that management is unsure of the direction of these businesses.
If there is good news, however, it’s that Jabil Circuit, Inc. (NYSE:JBL) has some very prominent customers in Apple Inc. (NASDAQ:AAPL) and Research In Motion Ltd (NASDAQ:BBRY) to help spur demand. Consider that when the DMS business soared 20% in the first quarter, it was largely due to stronger-than-expected demand for Apple’s iPhone 5. Recent reports suggesting that Apple is ramping up iPhone distribution in China, while also planning to release a cheaper version of the smartphone, have to be considered strong catalysts for Jabil.
