Thursday, December 21, 2006

Calls of Note Part 2

Several firms are commenting on Jabil Circuit (NYSE:JBL) after the co released its FQ1 results and FQ2 guidance:

- Merrill Lynch notes that last night, for the second quarter in a row, Jabil provided partial FQ1 (Nov) results as it continues with a stock option investigation, which now includes an investigation into revenue recognition for Q4 of F1999 and Q3 of F2001. According to JBL, end demand was more subdued than expected as FQ1 progressed due largely to consumer (36% of sales). This does not come as a surprise given ofirm's recent research (e.g., China trip, inventory study, etc.), which has raised a number of yellow flags in the supply chain.

Given JBL's consistent track record, tey were surprised by several new issues that popped up in FQ1. First and foremost, the company is discontinuing a consumer product it designed due to delays and rising price pressures. Also, a more material intensive product mix hurt gross margins by ~50 basis points, which given the lack of SG&A details, likely implies operating profits were under more pressure than the Street would have thought.

Based on deteriorating cash cycle days (23 days vs. 14 days in FQ4), it looks as if cash flow from operations was negative for the first time in more than five years. Cash declined from $774MM to $658MM.

- Bear Stearns thinks JBL's Nov qtr conference call and "subdued" outlook will likely spoil its holiday spirits. Uncharacteristic for Jabil, its call focused more on what went wrong (more "subdued " demand, less consumer upside in Nov, yet more downside in Feb, growing inventories, negative mix change hit margins by 50bps and ensured they won't hit 4%+ until at least May 2007, $12M write-off due to failed LCD TV investment, $4M in additional legal costs, new revenue recognition issues related to 1999 and 2001, still no clue when it can file its financials, behind plan in fixing May qtr operational issues, whew??? getting tired) than what went right (hmm..networking demand was positive, (read: CSCO).

Why not downgrade? Three reasons: 1) They believe the problems listed above are temporal as opposed to secular. 2) They still like the risk/reward. 3) JBL is still a solid company earning above avg ROIC with a mgmt team that can steer it back onto its path.

Lowers FY07 EPS to $1.39 from $1.68. Tgt goes to $32 from $35. Maintains Outperform.

- RBC Capital notes they expect JBL shares to trend lower given disappointing and limited financial information as old (repair, tooling, mfg issues) and new (ODM charge, product mix) issues impeded margins in Q107. While the bulls will point to revenue growth, they remain concerned with multiple issues JBL has to contend with. Maintains Sector Perform rating as JBL has a 15% premium to the group; firm would get aggressive when the premium dissipates.

Notablecalls: Think we will see JBL going below $26 level today. Shorting around the high end of $25 level will also likely lead to profits.

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