Jabil's Guidance Is Bad Sign For Apple's iPhone

Jabil Circuit, Inc. JBL announced some disappointing guidance – disappointing to the degree that it may spell trouble for one of its major customers Apple Inc. AAPL.

While the Street's expectation for FQ3 DMS revenue for Jabil was at +16.4 percent prior to the guidance announcement, Jabil provided guidance of -10 percent year-over-year.

Unfortunately, while Jabil may not benefit from Apple's success, the negatives implied by the guidance may tug on Apple's iPhone revenue. As explained by The Street, "With Jabil Circuit shares down more than 8 percent on the year and 15 percent in the past six months, Jabil – the world's third-largest producer of electronic components – has seen little to no benefit in its Apple partnership, despite Apple's iPhone sales momentum."

"In short, what's good for Apple doesn't guarantee good results for its parts suppliers."

Analysts' Take

Goldman Sachs released a company update on Jabil, maintaining its Neutral rating on the stock.

Justifying the maintained thesis, Goldman Sachs stated, "Importantly, we believe sales weakness is end-market related and not driven by share loss."

"For the stock, positives include what are likely more reasonable Street estimates for FY16 and easier FY17 comps, and solid execution in EMS," the analysts explained. "However, we believe valuation is full, and JBL is trading at a small premium to (peers)."

Goldman Sachs likewise maintains its 12-month price target of $19.

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Pacific Crest emphasized the reciprocity between Jabil and Apple, stating, "We believe Jabil Circuit's (JBL, not covered) weak FQ3 (May) guidance supports our view that iPhone demand is relatively soft."

"Although this is likely to remain a near-term challenge, we continue to believe normal replacement volume and moderated declines in new subscribers will drive solid growth in iPhone units during the iPhone 7 cycle, and commensurate earnings growth," Pacific Crest analysts explained.

Pacific Crest further elaborated on the relationship between the parts supplier and Apple, "In Jabil's F2015 (Aug.), Apple drove 24 percent of total revenue, which is slightly over 50 percent of total DMS revenue. Jabil believes it is still gaining share with Apple, so the revenue shortfall seems very likely to be a sharp reduction in the unit outlook, rather than share loss."

"We believe this estimate reduction captured the likely weakness represented by Jabil's lower-than-expected guidance, and therefore do not view Jabil's guidance as incremental risk to our estimates."

Pacific Crest has a $127 price target and Overweight rating on Apple.

Jabil was seen trading down 9.5 percent at $19.87.