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Analyst reports: Bulls turn bearish on Jabil Circuit

Analysts issue a raft of downgrades on the electronics and circuit board contract manufacturer, a day after it announced that the slumping market for PCs had dented quarterly profit.

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Analysts issued a raft of downgrades on Jabil Circuit and the stock hit a new 52-week low Wednesday, a day after the electronics and circuit board contract manufacturer announced that the slumping market for personal computers had dented quarterly profit.

St. Petersburg, Fla.-based Jabil, which assembles and designs computer parts, reported fiscal first-quarter earnings per share of 24 cents, lower than the Wall Street consensus of 26 cents. Revenue for the quarter was $1.13 billion, slightly lower than Wall Street's expectations of about $1.18 billion.

Jabil executives blamed the shortfall on a backlog of inventory in its customers' warehouses, citing a number of customers who have canceled orders unexpectedly in the past week. Jabil executives said customers are withholding orders until they reduce inventories.

Sales for the fiscal second quarter will be about $100 million to $150 million less than expected, chief executive Tim Main said in a conference call after the close of regular trading Tuesday.

Operating income will likely dip 11 percent in the fiscal second quarter compared with the fiscal first quarter, which ended Nov. 30. Fiscal third-quarter operating income will likely jump 32 percent from the current quarter.

Jabil stock fell to $19.38 in morning trading, touching down with a new 52-week low before a tepid rally raised the price to $21.25. The stock is down 23 percent since the close of regular trading Tuesday, and it's down 42 percent since the beginning of the year.

The past three months have been difficult for Jabil and scores of other technology companies, as slowing demand for personal computers ripples through computer makers, contract manufacturers and software developers. Other electronics makers, including leading contract manufacturer Solectron, Flextronics International, Sanmina, Celestica, Merix and SCI Systems, also fell in morning trading Wednesday.

Although Jabil received a round of accolades during its last quarterly conference call, analysts rushed to berate Jabil this time.

Chase H&Q analysts Roger Norberg, Ben Ruff and Tom Dinges lamented that Jabil was hit by a "near-term triple whammy" that included slowing demand for notebook and desktop PCs, which represent roughly 17 percent of Jabil's sales; difficulties with an application specific integrated circuit (ASIC ) supplier for one of its larger communications manufacturing programs; and cancellation of orders among numerous customers in the past week.

"The factors impacting Jabil are macro in nature and are going to be felt by all companies in the sector," the Chase H&Q trio wrote in a research note issued Wednesday. "Slowdowns in demand periodically occur and upset the linearity of sequential growth that comforts investors. Unfortunately, a truly smooth trajectory in the (electronics manufacturing service) industry is not attainable, if history is any guide."

Raymond James, Needham, Thomas Weisel and ING Barings cut their ratings on Jabil to "buy," while Goldman Sachs pulled Jabil from its "recommended" list and rated it "market outperform." SG Cowen downgraded it "neutral." Prudential Securities cut several notches, from "strong buy" to "accumulate."

Robertson Stephens and Bear Stearns reiterated their "buy" ratings, while Merrill Lynch maintained its "buy" rating but criticized the company for its "disappointing" quarterly report.

Others who maintained their relatively bullish stances pulled back on their estimates and 12-month price targets. Analyst Paul Fox at Banc of America Securities maintained his "strong buy" rating but slashed his 12-month target price to $40 from $75.

Analyst Scott Heritage at UBS Warburg maintained his "strong buy" rating but slashed his price target to $45 from $73 per share. He cut earnings-per-share estimates for fiscal 2001 to $1.04 from $1.16, and he also slashed 2001 earnings-per-share estimates to $1.32 from $1.48.

"Over the past couple of weeks, multiple customers have alerted Jabil that the targeted production levels will not be met over the coming couple of months," Heritage wrote in a research note issued Wednesday. "We basically think this represents a business slowdown at some Jabil customers as a result of the slowing economic environment. At the current time, management's expectation is that it will be a one-quarter issue, although we have concerns that this slowdown could certainly carry on for a greater period than one quarter."

The downgrades are a stark reversal from the last resounding round of broker reports on Jabil, which analysts issued three months ago. In research notes penned Sept. 20, analysts lauded the contract manufacturer for a stellar fiscal fourth quarter.