Why Jabil Is Just Now a Conviction Buy

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Jabil Circuit Inc. (NYSE: JBL) is in the unloved field of contract manufacturing, also known as electronic manufacturing services. This sector is not exactly exciting to investors, or at least that was the case until Tuesday. Goldman Sachs has raised Jabil’s stock up to the firm’s prized Conviction Buy List.

Stocks usually respond rather well when they are added on to the Conviction Buy List. What is even better here is that most firms are simply added after they were already at Buy ratings. Jabil’s rating up until Tuesday was a Neutral rating. Another boost is that Goldman Sachs raised the price target up to $20 from $18. If the price target is hit, that leaves an implied 20% upside from the prior closing price of $16.59.

Part of Jabil’s woes have been tied to weaker sales at Apple and Cisco. Goldman Sachs did warn in this key upgrade that Jabil’s near-term sales could even be weak. But the core earnings projection of $2.00 to $2.60 per share in 2015 and 2016 is above the consensus estimates.

Goldman Sachs also reminded investors that buying weakness in the EMS sector based upon weakness at their customer level has generally led to solid gains. If Goldman Sachs seems optimistic at $20, the consensus price target is up above $23 for the stock and the 52-week trading range is $15.30 to $24.32.

Jabil still does not sound like an exciting story on the surface, even with this solid buy recommendation. That being said, it is also trading at close to 10-times a forward blend of earnings estimates. Sometimes the best case for a value stock or a recovering earnings story is simply how cheap the stock is. That earnings multiple is far cheaper than the broad market, and Jabil also has something most EMS competitors do not have for investors - close to a 1.4% dividend yield.

Shares have responded rather well as Jabil’s stock price is up 6.45% at $17.66 on the news.

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