Jabil Shares Under Pressure Following Goldman's Downgrade To Sell

Goldman Sachs’ Mark Delaney believes there could be 13 percent downside risk to Jabil Circuit, Inc. JBL shares. Delaney downgraded the rating on the company from Neutral to Sell, while lowering the price target from $19 to $17.

Downside Risk To Expectations

“While we expect in line 2HFY16 results/guidance as FY16 consensus EPS has been reduced by 19 percent since last quarter, we now see 6 percent downside to FY17 Street EPS and 13 percent downside to CY17 Street estimate,” the analyst mentioned.

Apart from the revenue weakness due to the company’s exposure to areas such as handsets and printing, SG&A expenses and depreciation are rising, Delaney cautioned.

The analyst expects earnings pressure for Jabil Circuit from increased overhead costs as well as limited top line growth.

Expectations Lowered

Delaney also pointed out the consensus revenue forecasts for seven of the company’s top 10 customers had been reduced since the last earnings report.

The analyst also believes there is potential for margin pressure in 2HFY17 and FY18 if the next generation iPhone from Apple Inc. AAPL adopts partial glass enclosures.

On the other hand, depreciation and SG&A dollars have increased for Jabil Circuit by 30 percent and 10 percent year on year, respectively, year to date.

“Depreciation as a percent of sales could rise again in FY17E even if Jabil moderates capex from the very high levels in FY15A/16E,” Delaney added.

The FY16, FY17 and FY18 EPS estimates have been lowered to reflect expectations of lower sales.