Reversing course from last night’s gains, shares of
manufacturing equipment company Jabil (JBL 27.02, -2.64) trade 8.9% lower at
this juncture. Originally, the stock traded up about 5.6% in the after-hours
session as investors reacted favorably to the company’s third quarter beat. The
stock has pared those gains today, however, slipping into negative territory as
some call into question the earnings follow through.
All told, the third quarter was a win for Jabil as earnings of $0.46/share modestly beat market expectations while revenues were a more decided win for the company on growth of 21.1% year/year to $5.44 bln. Ultimately, investors seem to have taken a second look at the discrepancy between the top and bottom lines beats and to have not liked what they saw.
Parsing out the strength in sales, the diversified manufacturing services (DMS) group is showing the best growth. The business saw 36% sales growth to $2.3 bln, reflecting continued diversification and growth in health care, consumer goods, and the mobility business.
Electronics manufacturing services (EMS) also saw decent growth in the quarter – up 12% – as sales increased to $3.2 bln, reflecting growth across automotive, connected home, capital equipment, industrial, and energy and wireless infrastructure customers.
Management also noted some challenges in the company’s third quarter. Namely, Jabil experienced higher than expected factory costs as a result of broad-based material and component constraints. Also, the company noted lingering cost overruns within the packaging business – both of which combined to cost the company $12-13 mln in the period. Management noted these issues were temporary and would dissipate going forward.
What’s more, the company gave lukewarm fourth quarter earnings guidance of $0.56-0.80 – in-line with market expectations – while its revenue outlook came in above the Street at $5.20-5.60 bln. Management also commented that it sees gross margins for the fourth quarter “at or above” the 4.5% mark it saw in last quarter’s fourth quarter.
Jabil also lowered its free cash flow expectations for the year to $800 mln from $1 bln. Management noted this was the result of temporary working capital expansion to support revenue growth above previous expectations and a challenging components market. In the longer run, Jabil continues to expect cash flows from operations for the three-year period, FY2017 through FY2019, to be $3.5 bln.
Based on Jabil’s strong year-to-date results and its guidance, the company now expects fiscal 2018 revenue and core earnings per share growth of 14-23%, respectively, as it delivers on its core earnings per share target of $2.60. Additionally, given the confidence the company has in delivering $3.00/share in fiscal 2019 and the value it sees in its business, management has elected to increase and extend its capital return framework through fiscal 2019.
The company also announced the authorization of an additional $350 mln share repurchase program in addition to the $134 mln which remains on the previous authorization.
It may be worth noting that Jabil shares had moved about 12% higher into last night’s print from May 1 lows. Shares have given up the majority of those gains this morning, though, as shares crossed below both the 50-day simple moving average (28.19) and the 200-day (28.17).
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