Argus Downgrades Jabil Circuit On Reduced Growth Prospects

Jabil Circuit, Inc. JBL is being downgraded to Hold by Argus due to reduced growth prospects, according to analyst Jim Kelleher.

Following revised guidance for revenue and EPS projections, Jabil has been under analysts' scrutiny this week, particularly when considered against the backdrop of the company's most famous customer, Apple Inc. AAPL.

Jabil's guidance was lowered to -10 percent year over year for third quarter DMS revenue, compared to the Street's consensus of +16.4 percent.

Argus' Take

Argus surmised the lowered projections are correlated to Apple, citing that the revisions are "likely reflecting reduced demand from top customer Apple."

Related Link: Jabil's Guidance Is bad Sign For Apple's iPhone

Specifically, Kelleher stated Argus believes "the company's Diversified Manufacturing Services business (DMS) has not sufficiently diversified its revenue sources."

"[I]nvestors are focused on DMS, both because of the Apple relationship and because Jabil has highlighted DMS as its growth engine […] In December 2015, Jabil had projected DMS revenue growth of 14 percent in 2Q16; both revenue and operating profit in the DMS business missed Street expectations. CEO Mondello acknowledged that DMS faced a sharper-than-expected decline in product demand in 2Q16. However, while not minimizing the shortfall, he expressed Jabil's confidence that the lowered expectations would largely be a one-quarter issue," Kelleher elaborated.

"This is not the first time that Jabil's growth engine has misfired."

All Is Not Lost

Despite the new information regarding DMS, Kelleher is not overtly negative on the company, "Given the quality of the underlying business, we expect Jabil to ‘right the ship' in the coming quarters and are maintaining our long-term Buy rating."

"However, in light of the company's current challenges, we believe that a near-term Hold rating is now appropriate," Kelleher concluded.

Jabil was last seen trading at $19.63.