JBL: Nypro Deal Good Way to Expand, Say UBS, Citi

Shares of contract electronics manufacturer Jabil Circuit (JBL) fell 12 cents, or 0.6%, to close at $19.24 today after the company this morning said it would spend $665 million to acquire 58-year-old privately held Nypro of Clinton, Massachusetts, which focuses on production of “precision plastic consumables,” and which has over $1 billion in annual revenue.

Jabil’s head of “Global Business Units,” Courtney Ryan, said the deal will complement Jabil’s efforts to produce more healthcare hardware products.

UBS‘s Amitabh Passi, who has a Buy rating on Jabil shares, and a $23 price target, wrote today in a note to clients that with 45% of Nypro’s revenue coming from healthcare, the deal will expand Jabil’s market: the addressable market for healthcare products is $65 billion, whereas the market for “rigid plastic packaging” is $140 billion. Jabil has a “solid track” record with acquisitions, he writes, noting the 2007 purchase of Green Point, and the 2011 purchase of Telmar.

He adds, “Nypro�s customers include 5 of the top 6 brands in food & beverage and HPC, and its healthcare exposure will accelerate Jabil�s penetration in this market.”

However, adds Passi, “The portion of the deal that gives us some angst is the ~$400m in CE sales Jabil will acquire.”

Citigroup‘s Jim Suva, who has a Neutral rating on Jabil shares, and a $23 price target, notes that it’s Jabil’s largest deal ever, and something of a surprise given that he thought the company was focused on “organic” growth.

Suva concludes it’s a good deal for Jabil:

we conclude this is a positive for the following reasons: 1) Strategically this acquisition fits in very well into Jabil’s current product offering of Green Point in its Diversified Manufacturing Segment (DMS) which does Apple iPhone casing and other cell phone casings. 2) Favorable end
market mix of 45% Healthcare, 32% Consumer Electronics, 23% Packaging appears adept to leverage Jabil’s current Green Point and DMS competences. 3) Positive financial impact shown by our scenario analysis detailed in this report of $1.2 billion annual sales, 7% operating margin resulting in EPS accretion of $0.30-0.35 or a 10-15% increase in annual EPS with minimal restructuring (if any) needed.

That said, Jabil is in an unfavorable period in the electronics manufacturing services (EMS) stock cycle, and shouldn’t be bought now, Suva thinks. He prefers “connector” technology makers such as Amphenol (APH) and TE Connectivity (TEL).