UPDATE: UBS Raises Jabil Circuit (JBL) to 'Buy' Ahead of Q4 Results
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(Updated - September 21, 2016 9:09 AM EDT)
UBS upgraded Jabil Circuit (NYSE: JBL) from Neutral to Buy with a price target of $27. Analyst Steven Milunovich sees an inflection in cash flow, and he highlighted better near-term iPhone results and "more aggressive telling of its story by management."
Notable, Jabil reports Q4 results after the market close today, and it will hold an analyst and investor meeting in St. Petersburg, Florida, on September 27, 2016.
Milunovich explained his upgrade, "We have been bullish on the makeover that EMS companies are going through with customer diversification improving margins and providing consistency. However, we have been hesitant to recommend Jabil given high Apple exposure and capex. We now have more confidence based on (1) earnings momentum bottoming, in part due to an upturn in Apple business, (2) an expected substantial jump in free cash flow to around $2.60 per share in F17, and (3) a more aggressive telling of its story by management."
The analyst continued, "Jabil's stock has been range-bound for a decade and underperformed the market. The company's culture is low key and to be the 'brand behind the brand,' shining the light on customers rather than itself. With earnings being reported this evening and Jabil hosting its first analyst day in four years on Sep 27, we think that reticence is about to change. Management admits that Flex has been telling a similar story better. With capex declining by 40%, creating improved cash flow and the ability to repurchase almost $400mn of stock annually, it's a good time to be more visible in our view."
Milunovich added, "We are increasing EPS: F17e goes from $2.10 to $2.16 while F18e goes from $2.47 to $2.66. Our estimates go up largely because we are more optimistic on Apple revenue, which is 25% of the total. We think management wants to reduce dependence below 20% and may lower expected DMS growth to mid-single digits, still above the Street at 1%. We expect DMS and total revenue to rise by 3% in F17 but then accelerate to 10% and 6%, respectively, in F18 driven by iPhone 8. The operating margin should continue to rise toward 4%. Jabil could hit $2.60 in FCF in F17 and in earnings in F18."
Shares of Jabil Circuit closed at $23.16 yesterday.
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