Shares of design engineering services Jabil (NYSE:JBL) — which primarily specializes in electronics-related equipment — jumped sharply on Monday morning. Earlier, Chinese automaker BYD (OTCMKTS:BYDDY) announced that it would buy Jabil’s China-based mobile electronics manufacturing business in China for 15.8 billion yuan ($2.2 billion). On the disclosure, JBL stock gained 9% before slightly adding to the robust return.
According to Reuters, the acquisition will expand the consumer base, product portfolio and smartphone components business of BYD Electronic (OTCMKTS:BYDIF), a subsidiary of BYD. Fundamentally, BYD Electronic (BE) seeks to capture Jabil’s potential growth in the broader consumer electronics products space. Neither BYD nor BE disclosed how they planned to finance the deal. However, analysts suggest they will have to fund the acquisition with loan and equity issuance.
While JBL stock represented the clear winner for the Monday session, BYDDY, after initially suffering a sharp drop, eventually recovered to around a 2% gain.
“While improving BE’s market share of products, the acquisition will effectively synergize with BE’s existing products, enhance the overall competitiveness, ensure long-term sustainable development,” BYD remarked in an exchange filing.
JBL Stock Rises on the Targeting of New Markets
For Jabil, the deal represents a two-punch counterstrike. First, the deal allows the manufacturing specialist to invest in compelling new markets, particularly electric vehicles, renewable energy, healthcare and artificial intelligence-cloud data centers, among others. Second, the company can streamline its business profile.
Per UBS Research analysts, Jabil’s board of directors has been focused on addressing a growth fade in its mobile parts business. Therefore, the sale of the electronics manufacturing unit would streamline Jabil’s portfolio. That’s especially helpful amid the company’s steadily declining demand from key customer Apple (NASDAQ:AAPL).
Not surprisingly, then, JBL stock popped on the wider win-win proposition. For BYD, it seeks to expand into areas such as smartphones and laptops, thus diversifying beyond its core EV business. For Jabil, it desires fresh waters after doing what it could with said consumer electronics segments.
Assuming completion of the deal, the agreement would enable Jabil to “enhance our shareholder-centric capital framework, including incremental share buybacks,” remarked Jabil CEO Kenny Wilson.
Why It Matters
According to TipRanks, Wall Street analysts peg JBL stock as a consensus strong buy. This assessment breaks down as six buys, one hold and zero sells. Further, the experts’ average price target lands at $116.14, implying over 3% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
