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Expansion in U.S. Business Investment Affirmed By Jabil’s Sales

Jabil Sales affirm Expansion in U.S. Business Investment
A circuit board is inspected during the de-masking process at the Jabil Circuit Inc. facility in St. Petersburg, Florida. Photographer: Jim Stem/Bloomberg

Jabil Circuit Inc.’s confirmation of its sales forecast of about $16.4 billion for the fiscal year ending Aug. 31 is a signal that U.S. business investment is maintaining its expansion.

The St. Petersburg, Florida-based company yesterday reported sales rose 22 percent to $4.2 billion in the quarter ended May 31, a week after one of its largest customers, Research in Motion Ltd., missed profit and revenue estimates because of product delays. Another customer, Cisco Systems Inc., the world’s biggest networking equipment manufacturer, experienced weaker demand in its consumer, set-top box and government agency areas for the quarter ended April 30, Chief Executive Officer John Chambers said on a May 11 conference call.

Combined, RIM and Cisco comprise about 25 percent to 30 percent of Jabil’s sales, according to Sherri Scribner, a research analyst at Deutsche Bank Securities in New York. Jabil’s revenue expectations for the entire year suggest that its markets are still growing, she said.

“This is the first contract manufacturer to provide a positive comment regarding capital expenditures in the past couple months,” Scribner said. “While a few of Jabil’s major customers are weak, the company’s overall business is seeing good demand.”

Missed Forecasts

Jabil, the third-largest provider of electronic manufacturing services, offers a “good read” on business investment because it makes hardware products for automotive, industrial, medical and information technology companies, said Scribner, who maintains a “hold” rating on the stock. The company’s positive projection comes amid signs of a possible slowdown in IT after optical component makers Finisar Corp. and Ciena Corp. missed revenue forecasts, citing soft demand from telecommunications customers.

Demand patterns remain “good” in many of Jabil’s business segments, as “people are becoming a little bit more optimistic about late 2011 and prospects in 2012,” Chief Executive Officer Timothy Main said on a conference call yesterday.

“We’re in the midst of a slow, somewhat choppy economic recovery that continues to seem sustainable from our vantage point,” he said.

Capital spending is one of the primary drivers of the U.S. economy and a reflection of its overall health, according to Ethan Harris, head of developed-markets economic research at Bank of America Merrill Lynch in New York. Companies have been “tight-fisted” in the last few years -- under-spending on equipment or postponing upgrades -- so positive indicators from the supply chain could have broader implications, he said.

Five-Year Low

Since reaching a five-year low in the second quarter of 2009, the last quarter the economy was in the recession, business investment in equipment and software climbed 23 percent before adjusting for inflation. By comparison, gross domestic product was up 7 percent over the same period.

“Companies have effectively been adding no new capacity, even with the recovery in the economy,” Harris said. “There’s a lot of room for growth even without a boom in the economy.”

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