Jabil Stock: An investment thesis still firmly intact (NYSE:JBL)
Jabil (NYSE: JBL) has increased by 65% since I started my Seeking Alpha coverage in August 2020 (see Jabil: no short circuit here). Given the market’s recent rediscovery of “value” and its abandonment of technology companies, investors might think it’s time to take some profit from Jabil and move on. Some have obviously done so (the stock is down 18.5% since the start of the year). However, that would be a mistake in my opinion because Jabil – with a Forward P/E of just 7.9x – is the embodiment of value. I say this because – despite all the recent macro headwinds – the latest EPS report demonstrated what Jabil has been delivering for some time: increased revenue, increased margins and increased free cash flow. Today I will update investors on the performance of the company and what to expect in the future.
As most of you know, Jabil operates two segments: Diversified Manufacturing Services (“DMS”) and Electronics Manufacturing Services (“EMS”). Due to management’s efforts to diversify the company’s revenue base and to prioritize high-margin contracts as opposed to revenue growth simply for “growth” reasons, the company now has an allocation revenues of approximately 50/50 between the two segments:
As I’ve highlighted in my previous Seeking Alpha articles on JBL, this is important because it has allowed the company to expand into fast-growing areas such as healthcare and eco-packaging while being able to be more selective in its historical EMS business – focusing only on higher margin products.
In the meantime, the global secular bull market in all things electronics is far from over in my opinion. Broadband networks, IoT, cloud computing, data centers, 5G infrastructure, automobiles and electric vehicles, specific hardware accelerators to run AI/ML algorithms on big data – all of these tech sub-sectors are still in full bloom” In my opinion. Apple (AAPL), Jabil’s biggest customer, is still enjoying a very good 5G smartphone upgrade cycle.
So let’s take a closer look at Jabil to see how he’s been doing lately.
The company released its Q2 FY22 EPS report on March 16 and it was more what investors expect from Jabil. Highlights included:
- Revenue of $7.55 billion was up 10.6% year-on-year.
- Net income of $222 million increased 46% year-on-year.
- EPS of $1.55/share was up 52% year-on-year.
- Adjusted free cash flow (support for acquisitions and divestitures) was $200 million.
- Shares outstanding at the end of the quarter were 146.4 million, down 4.2% year-on-year.
Note that the quarter was driven by a 19% increase in EMS revenue while generating a 4% margin. And here’s what I talked about: While it’s pretty obvious that EMS and DMS are relatively low-margin businesses, Jabil is all about increasing margin. And this is the main reason why Jabil’s free cash flow has increased:
Note that Jabil was able to grow the DMS segment margin from 3.7% in FY20 to 5.0% year-to-date, or +35%. In the EMS segment, margins increased from 2.7% in FY20 to 4.0% year-to-date, or +48%. Meanwhile, total revenues have increased by approximately 19% over this period. So what you have here is revenue and margin growth, which leads to higher earnings and more free cash flow for shareholders.
However, the market still does not seem convinced that this performance will continue. I say this because the stock fell from a high of over $71 at the start of the year to close Friday at $57.46, and down 18.5% year-to-date. The stock now trades at pitifully low forward EPS estimates of 7.9x.
Due to the contractual nature of Jabil’s business, management generally has excellent visibility into future performance. Its current guidance for the full 2022 fiscal year is shown below:
Given that JBL has already released results for the first two quarters of FY22, I would say that these forecasts will be quite close to actual results. So let’s compare these expectations with the results for fiscal year 2021:
|Results for the 2021 financial year||Directions for the 2022 financial year||
|Revenue||$29.285 billion||$32.6 billion||+11.3%|
|Core operating margin||4.2%||4.6%||+9.5%|
|Adjusted FCF||$640 million||$700 million||+9.4%|
So, at Jabil, we have a business growing at a double-digit rate, growing margin, and driving even stronger EPS and FCF growth. Still, the company is trading at a forward P/E = 7.9x…a note that compares to an S&P500 P/E of 21.6x.
Led by Jabil’s growing EV business, DMS’s Auto & Transportation component is expected to grow revenue by around 50% year-over-year (see previous chart above). The 5G Wireless & Cloud and Industrial & Semi-Cap sectors continue to develop well in the EMS segment. Going forward, expect Jabil to continue to reduce low-margin businesses and improve its overall product mix. This strategy has worked well over the last few years and I think it has more room to maneuver at least until this year and probably in the first half of the 2023 calendar as well. Jabil has the potential to increase the overall operating margin to at least 5% by mid-2023.
All current macro-environmental risks apply to Jabil: the potential impact of the global pandemic on factory closures and supply chain disruption, high inflation eating away at consumer discretionary spending, rising interest rates and Putin’s horrible war of choice in Ukraine which resulted in the sanctions imposed on Russia by the United States and its Free Democrat allies in NATO as well as by many countries in Asia. Each of these factors could lead to slower economic growth, and together they could cause a global recession (or worse).
According to the FY21 annual report, Apple accounted for 22% of Jabil’s annual revenue – and it’s now the only customer accounting for more than 10%. However, given Apple’s continued good performance during the current 5G upgrade cycle, I actually consider the fairly significant reliance on Apple to be a net positive as opposed to a negative. That said, losing a large chunk of Apple’s revenue would obviously affect the stock price.
Summary and conclusions
Jabil’s management team has done an excellent job of managing the global pandemic and the resulting supply chain disruptions. There continues to be strong secular demand for many of the end markets served by Jabil: 5G, healthcare, electric and automotive vehicles, mobility, and industrials and mid-caps, to name a few. That said, Jabil continues to grow revenue and margins, which has led to outsized net income gains and the generation of excellent free cash flow growth (around $4.78/share for the exercise 22).
The company’s current forward P/E of just 7.9x, even in the face of a clear line of sight in FY2022 results, indicates that Jabil stock is still the epitome of ‘value’ despite its excellent growth profile. Jabil is a BUY, and investors should take advantage of market volatility (like Friday’s crash…) to accumulate stocks.
I’ll end with a chart of Jabil’s 10-year share price and note the outsized impact that the pandemic – and the shift to mobile labor everywhere – has had on an electronics manufacturing company like Jabil. I also point out the rather severe correction of the title since the beginning of the year: