Tom A's Stock Picks

Jabil Circuit (JBL) CEO is buying

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Jabil Circuit (JBL), at today's closing price of 10.78, is attractive at a price/sales ratio of .18. Jabil is in the Electronic Manufacturing Service business. EMS is extremely competitive and cyclical, and in recent years JBL and various of its competitors have been involved in restructuring. For JBL, that seems to be an ongoing process, moving work to lower cost areas, with regular charges. EPS is low as a percentage of Cash Flow, so the price history looks quite high compared to earnings. Margins have been thin for years, especially recently. The attraction here is if they can get back to their 5 year average net income as a percent of revenues, EPS will increase substantially, moving the stock from its current 10.xx to somewhere between 17 and 27. You get a dividend, 2.62% at today's price, while you wait.

I have had very mixed results with low Price/Sales ratio situations as value candidates. It is tempting to look at a final margin of .5% (for example) and figure if it could be increased to 2%, which seems easy enough, then EPS would quadruple. All too often margins are thin because of intense competition and it seems there is hardly enough profit to cover the risk of credit loss, slowdowns, etc. But Jabil has traded at price to sales ratios of 1 X frequently over the past 5 years and if it ever returns to that area, it will be a definite winner.

Using a service like Jabil, as compared to building product in house, is attractive for a number of reasons. First, Jabil has plants in low cost areas, so U.S. or other high cost manufacturing operations can be offshored without the delay and expense of setting up a new plant. Also, customers who have cyclical variations in volume can avoid the cost of temporarily idled manufacturing facilities. Finally, Jabil has considerable expertise and may be able to do a better job than their customers can do in house. During economic slowdowns, outsourcing is attractive as a cost-cutting measure. EMS is a good business and should grow steadily as world consumption increases. Jabil has grown 20% per year over the past 5 years, partly by acquisition, with a slowdown this year. I think long term they can to 7% or better per year.

Using 7% growth and 5 year average margins, JBL should be able to earn 1.00 to 1.10 per share, at a P/E of 17 that would be 17 or 18 per share. The stock has often traded higher than that when growth prospects look good, so possibly the upside could be greater.

CEO Tim Main recently bought 50,000 shares at 9.00-9.25. My timing is not as good as his, so for my SLOport my average cost is 11.67, although I did buy some at 9.14, getting the "smart money" price on part of my position. Any wonderful things that may happen will be later this year or early next, so there is time to enlarge the position if it backtracks - the idea would be to buy more at 9.00 to 9.25, do like the CEO, buy near the bottom. It doesn't always work, but I have had some success stories buying at prices where management bought substantial amounts.

Tom