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Stock Strategist

Can Jabil Successfully Transform its Business?

Chasing higher margins in the short term may not pay off in the long term.

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 Jabil Circuit (JBL) has been gaining market share at the expense of competitors during the last couple years, especially in the higher-margin industrial/instrumentation and medical spaces. This is consistent with the company's strategic goal of moving a larger portion of its business into higher-margin verticals, something it spelled out in considerable detail less than two weeks ago. However, we feel the difficult industry dynamics of contract manufacturing will eventually undo any increases in profitability that occur in the near-term.

During fiscal 2010, Jabil was able to grow industrial/instrumentation and medical sales 44% year-over-year, to $3 billion. These verticals comprise roughly half of the company's diversified manufacturing services, or DMS, group, which also includes clean technology, defense/aerospace, and aftermarket services. Comprising 36% of total sales, management has stated its intention to grow this area of its business to 50% of revenue. The rationale for such a strategy makes sense: The high operating margins in this area--which were 6% in fiscal 2010--currently drive more attractive returns on capital than are available in other areas of contract manufacturing.

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Stephen Simko does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.