Sometimes having a big customer can be great, but if that client slows down their purchases, or changes their preferred vendor, it can be harmful for the business as a whole. This is the case for this week’s Bear of the Day, Jabil Circuit (JBL – Analyst Report) as their big client Apple has lowered their order volumes over the past few months.
This Zacks Rank #5 (Strong Sell) is a worldwide independent provider of electronic manufacturing services. It designs and manufactures electronic circuit board assemblies and systems for major original equipment manufacturers in the communications, computer peripherals, personal computer, automotive and consumer products industries. It serves its original equipment manufacturer customers with dedicated work cell business units that combine high volume, highly automated continuous flow manufacturing with advanced electronic design and design for manufacturability technologies.
In their most recent earnings report, the company missed both the Zacks Consensus Earnings and Revenue estimates by a significant margin. On a quarterly basis, the company saw earnings per share decline -36.1%, and revenues fell by -15.4%. Specifically, the Diversified Manufacturing Services (DMS) segment saw revenues decline by -30% as sales came in about $150 million below management’s expectations. This was due to Apple lowering their total volume of purchases. Also, the Electronics Manufacturing Services (EMS) segment saw revenues decline by about -1.0%.
Due to the weaker than expected performance in the DMS segment, management lowered revenue expectations for Q3 16 from $4.75 billion to a range of $4.1-$4.3 billion, and lowered EPS estimates for the quarter from $0.51 to $0.12-$0.18. Management also lowered FY 16 guidance in both EPS, and revenues as well; EPS estimates were lowered from $2.65 to $2.12, and revenues from $20 billion to $18.5 billion.
According to Mark Mondello, CEO, “…our DMS segment grew modestly as we faced a slight downturn in product demand late in our fiscal quarter specific to our mobility business.” This slight downturn is shaving $1.5 billion off their revenue expectations for the year.
As you can see from the graph below, JBL has been underperforming the S&P 500 for almost all of 2016, and with the recent negative estimate revisions, this is expected to continue for the near term.
Due to the negative guidance, estimates for Q3 16, Q4 16, FY 16 and FY 17 have all seen significant downgrades over the past 30 days. Q3 16 plummeted from $0.41 to $0.05, Q4 16 fell from $0.53 to $0.44, FY 16 slipped from $2.18 to $1.68, and FY 17 crashed from $2.49 to $1.92.
As Apple’s ordering pattern continues to decline (management noted that January orders were below expectations, and that accelerated into February, which caused management to lower expectations for Q3 and Q4), the DMS segment will remain under pressure, and this is not expected to change within the very near term. Therefore, JBL will face this headwind into Q4 16.
If you are inclined to invest in the Electronics Manufacturing Services sector, you would be best served by looking into another investment opportunity. All six companies in this sector hold a Zacks Rank #3 (Hold) or lower (Sell).
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