Jabil Inc. (JBL)
Current Price (as of 4/9/2024): $136.63
Business
Jabil Inc (JBL) is a global manufacturing corporation employing over 140,000 individuals across 100 sites spanning over 25 countries. JBL assists companies in bringing products to market by offering services such as design engineering, supply chain management, and manufacturing. A multitude of everyday items, ranging from smartphones and coffee makers to crucial healthcare diagnostic tools and automotive safety systems, owe their existence to the manufacturing and supply chain services provided by Jabil.
JBL conducts the majority of its operations in facilities located in China, India, Malaysia, Mexico, Singapore, and the United States. With its global manufacturing production sites, JBL enables customers to manufacture products in locations convenient to their intended end users.
JBL has two reporting segments: Electronics Manufacturing Services (“EMS”) and Diversified Manufacturing Services (“DMS”). The EMS segment, which accounts for 49% of total revenue, focuses on leveraging IT to optimize production and maximize revenue, supply chain design and engineering, and technologies centered on core electronics—essential components for electronic devices. Additionally, the EMS segment leverages JBL’s extensive manufacturing infrastructure and its capability to serve customers across diverse industries, including telecommunications, cloud computing, digital printing and retail, industrial and semiconductor capital equipment, as well as networking and storage. Known for its high-volume production capabilities, the EMS segment produces products quickly in large quantities.
The DMS segment accounts for 51% of revenue and is focused on providing engineering solutions, with an emphasis on machining, tooling, and molding—three processes commonly used in manufacturing to shape materials into desired forms, particularly highly engineered plastic and metal parts. DMS customers operate in the following industries: automotive and transportation, connected devices, healthcare, and packaging.
JBL’s key product offerings are summarized in slides below.
Positive Outlooks
Jabil recently reduced its exposure to lower-margin products, such as casings made for Apple iPhones, and to China through the divestiture of its mobile business to BYD, a Chinese multinational company, for $2.2 billion. The deal was completed on December 29, 2023, and will enable the company to enhance shareholder value through incremental buybacks and investments in high-growth end markets, such as automotive and transportation, industrial and semiconductor capital equipment, healthcare, and AI cloud data centers.
No single product or product category constitutes more than 5% of JBL’s overall business, providing an extra layer of assurance amidst fluctuating demand, shifting global preferences, and ongoing technological advancements.
AI is gaining traction in JBL’s cloud business, with significantly increased demand for services related to AI specific to hardware, manufacturing, and design. Additionally, the volume of AI GPUs in the first half of 2024 was 200 times that of 2023. On March 25, 2024, MaxLinear, a fabless semiconductor company (meaning they design chips but don't manufacture them), announced in collaboration with Jabil, the availability of a series of 800G optical modules. These modules utilize light for data transmission, replacing traditional electrical signals, and are intended to advance the capabilities of Artificial Intelligence/Machine Learning technologies. The introduction of the new 800G optical interconnect sets a new benchmark for speed, efficiency, and reliability in data transmission, crucial for supporting Artificial Intelligence/Machine Learning applications. Jabil will ensure unparalleled scalability of the 800G optical modules by supplying them to the market.
Jabil is committed to delivering adjusted free cash flow in excess of $1 billion for the second consecutive year in FY2024. Drivers of future free cash flow are expected to be earnings expansion, working capital efficiencies, and disciplined capital expenditures.
Negative Outlooks/Risks
For the second quarter of FY2024, which ended on 2/29/2024, the 5G and renewables businesses were unexpectedly and negatively impacted by continued soft demand associated with those end markets. This partially caused EMS revenues to come in roughly $100 million to $200 million below expectations for the quarter. JBL anticipates renewables and semi-cap demand to remain muted for the remainder of FY2024. However, management remains bullish on automotive and transportation (EVs). Despite this optimism, global sales of EVs slowed in 2023, with the growth rate decreasing from 54.2% in 2022 to 28.9% in 2023. If EV sales growth rates continue to slow, management may need to revise downward their expectations for automotive and transportation.
Jabil depends on a small number of customers to contribute a significant portion of its net revenue. A reduction in business from one or more of JBL’s largest customers could have a material adverse effect on its results of operations. Furthermore, operating results could be negatively impacted if one or more of JBL’s largest customers are unable to pay JBL on time. Additionally, most of JBL’s customers do not commit to firm production schedules for more than one quarter and sometimes cancel orders or change quantities, resulting in a decline in production, write-downs, and a reduction in sales.
JBL competes with numerous manufacturing service providers, electronic manufacturers, design providers, and customers opting to manufacture products internally. Unfortunately, the manufacturing process is not subject to many proprietary protections, and some of JBL’s competitors have greater financial resources, which they could use to drive down prices, potentially reducing JBL’s sales and/or profits.
Financial Results and Outlook
Second quarter FY2024 results were mixed, with revenues totaling $6.7 billion, which was 20.9% less than the same quarter of the previous year. Specifically, revenue for the DMS segment came in at $3.4 billion, down approximately 16% from the prior year, driven almost entirely by year-over-year comparisons due to the mobility divestiture. Revenue for JBL’s EMS segment was $3.3 billion, down roughly 18% year-over-year and approximately $100 million to $200 million below JBL’s expectations for the quarter. During the quarter, JBL repurchased $825 million worth of stock, leaving the company with $1.2 billion remaining on its current repurchase authorization as of February 29, 2024. US GAAP earnings per share were $7.31 for Q2 FY24, exceeding the prior year’s quarter by $5.79. The large increase was due to the gain on sale from the mobility business divestiture. Core diluted earnings per share (non-GAAP) came in at $1.68 per share, down approximately 10.6% from the same quarter in the prior year.
JBL’s financial outlook for Q3FY2024 puts net revenue in the range of $6.2 billion to $6.8 billion, representing a decrease of 26.8% to 19.7% from the prior year. Specifically, DMS revenue is expected to come in at $3.3 billion, and EMS revenue is projected to be $3.2 billion. Core diluted earnings per share (non-GAAP) are projected to range from $1.65 to $2.05, somewhat in line with the same quarter from the prior year at $1.99. Core operating income margin (non-GAAP) is projected to be 5.6%, up 19% year-over-year.
Valuation
Management’s FY2024 full-year guidance for core EPS is $8.40, reflecting improved core operating margins and accelerated share repurchases. Pairing FY24’s estimated EPS of $8.40 with JBL’s current stock price of $136.63, we calculate a forward P/E of 16.26x, which places it 34.6% below the IT sector average of 24.88x and at a discount to the forward P/E of the S&P 500 at 20.5x. Furthermore, JBL generated $1,026 million in free cash flow in 2023 and expects to do the same in 2024. If JBL can generate $1 billion in free cash flow this year, that would amount to an impressive $7.88 per share based on 126.9 million diluted shares outstanding at the end of Q2. However, it's important to note that management plans to accelerate share repurchases in 2024, so both free cash flow per share and earnings per share figures should continue to benefit.