Following Jabil's Q3 Earnings, Argus is Cautious Short Term But Confident Long Term

Jabil Circuit, Inc. JBL, which makes Apple Inc. AAPL iPhone casings, reported slightly better-than-expected third -uarter results, albeit against low expectations. But, Argus is cautious in the near term despite bullish over long term.

The contract manufacturer attributed a softer mobile device demand environment as a key reason for the weak performance in the third and fragile outlook for the fourth quarter. Further, the company cut its full-year outlook for a second consecutive quarter.

"Jabil's EMS business is performing well in a challenging environment. And parts of DMS, such as the medical and consumer packaging businesses, represent attractive long-term markets for Jabil. Given the quality of the underlying business, we expect Jabil to "right the ship" in the coming quarters," analyst Jim Kelleher wrote in a note.

Related Link: Reaction To Jabil Circuit's Earnings: Exposure To Apple Is A Risk

"On that basis, we are maintaining our long-term BUY rating. In light of the company's current challenges, however, we continue to believe that a near-term HOLD rating is appropriate," Kelleher added.

Jabil now looks for fourth quarter revenue of $4.1 billion–$4.3 billion, which at the midpoint would be down 9 percent; the Street had projected revenue in the $4.6 billion range. The company also forecast non-GAAP EPS of $0.15–$0.35, which at the guidance midpoint of $0.25 would be down 52 percent from $0.53 a year earlier.

For all of FY16, Jabil sees revenue of $18.2 billion, down from prior forecast $18.5 billion (which was reduced from $20 billion in March), and non-GAAP EPS of about $1.85, down from earlier view of $2.12 (which was reduced from $2.65 in March). The Street expects EPS of $1.83 for FY16 and $2.07 for FY17.

As a result, Kelleher slashed his FY16 non-GAAP earnings forecast to $1.83 a share from $2.10 and trimmed his FY17 projection to $2.15 a share from $2.35. The analyst's GAAP forecasts are $1.29 per a share for FY16 and $1.83 for FY17, with his long-term EPS growth rate estimate at 10 percent.

The headwinds facing DMS and the Jabil Green Point (fast turn) business are now likely to persist longer than initially thought. In March, Jabil expected a rebound in the handset business in the June time frame, while it currently expects the rebound to begin in August.

The Green Point business, in which the iPhone casings contract is situated, is working to aggressively manage costs. However, the company said the team is simultaneously "navigating very complicated product ramps" that are critical to the customer.

At the time of writing, shares of Jabil shares were down 0.48 percent at $18.69.