Expect 'Quiet' Jabil Circuit To Make Noise, Says UBS

UBS upgraded Jabil Circuit, Inc. JBL to Buy from Neutral ahead of its Q4 earnings, expected after the bell.

"We now have more confidence based on (1) earnings momentum bottoming, in part due to an upturn in Apple business, (2) an expected substantial jump in free cash flow to around $2.60 per share in F17, and (3) a more aggressive telling of its story by management," analyst Steven Milunovich wrote in a note.

Wall Street expects earnings of $0.25 a share on revenue of $4.27 billion. UBS sees fourth quarter earnings of $0.26. In the past four quarters, the company's earnings have topped Street view thrice.

Milunovich, who raised his price target on the stock by $7 to $27, believes the company's "low key" nature is set to change with the fourth quarter earnings and hosting of its first analyst day in four years on Sept.27.

"With earnings being reported this evening and Jabil hosting its first analyst day in four years on Sep 27, we think that reticence is about to change. Management admits that Flextronics International Ltd. FLEX has been telling a similar story better," Milunovich highlighted.

"With capex declining by 40%, creating improved cash flow and the ability to repurchase almost $400mn of stock annually, it's a good time to be more visible in our view," the analyst continued.

The key investor concern on Jabil was its overreliance on Apple Inc. AAPL, which accounts for 25 percent of revenue. The company aims to cut this to 20 percent and UBS says Jabil may trim its expected DMS growth to mid-single digits, still above the Street at 1 percent.

Meanwhile, Milunovich raised his F2017 EPS estimate to $2.16 from $2.10, as he is "more optimistic on Apple revenue."

"We expect DMS and total revenue to rise by 3% in F17 but then accelerate to 10% and 6%, respectively, in F18 driven by iPhone 8. The operating margin should continue to rise toward 4%. Jabil could hit $2.60 in FCF in F17 and in earnings in F18," Milunovich added.