Buy Jabil Circuit Ahead of Earnings

NEW YORK (TheStreet) -- Jabil Circuit (JBL), which will report fiscal fourth-quarter results on Wednesday, still seems misunderstood.

Jabil, which has (among others) Apple (AAPL) and Cisco (CSCO) as very important customers, is without a doubt one of the best brands in the electronics manufacturing service (EMS) business. But the company has been working over the past couple of years to branch out of that business and into what it calls diversified manufacturing service, or DMS.

On many levels, the fact the company wants to build its capabilities in this new area makes plenty of sense, especially considering Jabil can then become an even more important supplier to Apple. The thing is, however, this transition has gone on much longer than investors expected. Therefore, with seemingly very little progress in the company's changeover, the stock had not gone anywhere for almost a year.

Back in June I told you that shares of Jabil, which at the time were trading at around $19, were too cheap to ignore. In that article , I pointed out the stock could reach the range of $25 to $27 per share, assuming that Jabil could deliver modest, free-cash-flow growth and 4% to 6% revenue growth. Considering that Jabil was coming off of a very disappointing quarter, my optimism wasn't well received. However, I will admit: It certainly didn't help the company missed third-quarter revenue estimates -- let me just get that out of the way. The fact that management issued lower-than-expected guidance roughly 2% shy of expectations was a 1-2-punch tough to overcome. Even so, since that article shares of Jabil have advanced by as much as 22.5%, reaching a high of $24.32 two weeks ago. Now, I'm not here to toot my own horn nor suggest that I had any special insight as to the company's future plans. After all, the stock still has slightly less than 3% higher to go before reaching the low end of my $25 target. What I want to clue you in on is why I was so confident three months ago and why I still believe the stock will reach the high end of my $27 target.

I didn't blame investors for their cynicism after the June quarter. But there was, nonetheless, an exaggeration with June's results. While it's true the company's revenue miss was a letdown, it's also true that, by virtue of Jabil's 5.1% year-over-year revenue increase, Jabil's results were nonetheless within management's prior stated range of $4.3 billion to 4.5 billion. Not to mention, on a sequential basis, revenue inched up 1.1%.

Too much was also being made on the less-than-stellar results of the DMS business, which declined 4% year over year. But, as noted, this is a part of the transition management has been working to build. To that end, some struggles are expected. But the company more than made up for this deficit in areas like High Velocity, which jumped 23% year over year and beat prior expectation by 10%.

Along the same lines, Enterprise & Infrastructure revenue, which accounts for 31% of total revenue, advanced 4% year over year. What's more, the company managed to grow gross margin by 10 basis points sequentially, while reducing operating expenses by 20 basis points year-over-year and 10 basis points sequentially.

To that end, despite the revenue miss and the uninspiring guidance, there was evidence of a well-managed business -- one that I believe was grossly undervalued. On Wednesday, following the company's fiscal fourth-quarter and year-end results, Jabil will reveal if my confidence is justified. The Street will be looking for 54 cents in earnings per share, or revenue of $4.53 billion, which represents 4.5% year-over-year revenue growth. To the extent that Jabil can beat the Street's revenue estimates and show better improvement in the DMS segment, management will solidify the company's course. So although I don't want to overstate the importance of one reporting period, this is the first time in almost a year that this stock has shown this level of confidence. With strong growth momentum, I don't see anything preventing the stock from reaching $27. At the time of publication, the author held shares of Apple. Follow @saintssense This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Saintvilus is a co-founder of StockSaints.com where he serves as CEO and editor-in-chief. After 20 years in the IT industry, including 5 years as a high school computer teacher, Saintvilus decided his second act would be as a stock analyst - bringing logic from an investor's point of view. His goal is to remove the complicated aspect of investing and present it to readers in a way that makes sense. His background in engineering has provided him with strong analytical skills. That, along with 15 years of trading and investing, has given him the tools needed to assess equities and appraise value. Richard is a Warren Buffett disciple who bases investment decisions on the quality of a company's management, growth aspects, return on equity, and price-to-earnings ratio. His work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets.