QQQ - Jabil: Benefiting From High-Tech Supply Chain Off-Shoring (From China)

Summary

• A more militarily assertive China, U.S. high-tech trade restrictions, COVID-19 lockdowns, and labor issues at Apple's Foxconn site are all reason to re-shore supply chains away from China.
• Florida-based Jabil is in an excellent position to benefit from the trend to re-shore or relocate Chinese manufacturing operations.
• That's because Jabil is a global manufacturing company with 50+ million square feet of manufacturing space across 100 locations in 30 countries.
• Today, I'll discuss how Jabil can benefit from this - and another market trend - going forward.

Last month, Seeking Alpha published my article about electronic manufacturing services ("EMS") company Jabil ( JBL ) that explained what a terrific value the company's stock represents and what to expect in the upcoming Q1 FY23 quarterly report - which is due out this Thursday, Dec. 15, 2022, before the market opens (see JBL: Value Stock Is Up In The Bear Market ). Today I want to discuss two trends that will likely benefit Jabil shareholders for years to come. The first is the current trend to off-shore high-tech manufacturing away from China to countries more friendly to the U.S. and, of course, right back here at home. The second will discuss JBL's relatively new business model and diversified product mix that focuses on higher-margin products in which the company doesn't just build something that's handed to it by a customer, but instead enables the company to collaborate with customers in order to contribute its own manufacturing, design, and supply-chain expertise with the goal of designing exceptional products that Jabil then manufacturers for them.

Re-Shoring High Tech Away From China

As most of you know, the tension in U.S./China relations has significantly ramped up in recent years. In August, China surrounded the island of Taiwan and held live-fire military drills. In October, the Biden administration enacted high-tech trade restrictions on China - specifically in the area of advanced computing semiconductors and semiconductor equipment. These actions, combined with China's "Zero COVID" related lockdowns and the associated labor unrest at Foxconn's "Apple City" in Zhengzhou, China has Apple and other American high-tech companies scrambling to re-shore, or at least off-shore away from China, their high-tech manufacturing and assembly operations.

Florida-based Jabil has a global footprint in 30-countries and is in an excellent position to benefit from these re-shoring efforts. CEO Mark Mondello commented on this subject during the Q4 conference call in September:

... there is no big changes to our footprint anticipated ‘22 to ‘23. We really like the footprint that we have. We think that our current footprint with the number of factories you have in the U.S. and our ability to expand those factories might serve us well to the extent there is some re-shoring with clean energy. We will see what happens with the CHIPS Act. We have been staying very close to that directly with our friends in D.C. There are a lot of details that need to be worked out there ... Over the last number of years, we have expanded into and continue to grow in Malaysia . We have ramped up a wonderful campus in Vietnam . We will continue – Southeast Asia will certainly continue to be of interest to us .

As you can see, Modello appears to be very confident in Jabil's current footprint outside of China, but he also said:

By the way, we also have a wonderful footprint in Mainland China that we are pleased with. And then lastly, for India, I think India, we have done what I would consider moderate, maybe even modest on a relative basis investments in India around the Mumbai area in Pune. And that campus continues to scale.

Given the re-shoring thesis, combined with its excellent financial performance, I'm not surprised that Jabil has caught a bid this year and is nicely up during the 2022 bear market:

Now, there are some potential issues with respect to electricity prices. On the previously referenced conference call, Mondello discussed the issue and said that the company's big two revenue generators in Europe are in Poland and Hungary. Mondello reported that JBL did a deep-dive on how Poland and Hungary generate their power and believe that the impact on JBL through the winter months will be "modest."

In addition to the re-shoring thesis, Jabil is likely to benefit from another major positive catalyst for years to come.

A Changing Business Model

As some of you may already know, Jabil used to be heavily reliant on a single company: Apple ( AAPL ). Jabil is still a very significant Apple supplier - after all, about 22% of 2021’s revenue came from Apple. That equates to an estimated $6.4 billion. So it's a big business.

However, Jabil has worked diligently over the past few years to diversify its product line while at the same time shifting to higher-margin contracts and away from the more commoditized lower-margin products that were such a large percentage of its business in the past. Consider the slide below, which was taken from JBL's recent Q4 FY22 Presentation :

As you can see, Jabil has built up diversified segments like Auto & Transportation and Healthcare & Packaging into big businesses (in aggregate, $8.1 billion in FY22 - larger than Apple revenue last year). As a result, Jabil is now making medical devices for Johnson & Johnson ( JNJ ) and components for Tesla ( TSLA ) EVs. Indeed, last year Goldman Sachs upgraded Jabil stock due to its exposure to EV makers Tesla and Rivian (RIVN). Both medical devices and EV components are the types of products that JBL can not only manufacture, but also can offer its technical expertise in design, manufacturing, and supply-chain management. These type of components not only have higher-margin than the typical Apple component that Jabil makes, but they also typically have longer product-cycles as compared to the consumer cell-phone market. This is one reason margin is higher, because there is less re-tooling involved over a longer manufacturing cycle.

Indeed, readers of my previous Seeking Alpha articles on Jabil know that the combination of margin expansion and share buybacks means that Jabil's earnings are growing faster than its revenue growth. As I pointed out in the previously referenced article last month, core operating margin in FY22 was 5%, up 80 basis points over the prior year. Combined with share buybacks that reduced the Q4 ending share count by 6.5% yoy, means that the company's GAAP EPS for FY22 ($6.90/share) grew by 50.7% yoy while revenue grew only 22%. I say "only" 22%, but most investors realize that a stock that grows at a CAGR of only 15% yoy - all things being equal, yet acknowledging they aren't - will double every 5-years.

Competition

The biggest player in the electrical/mechanical manufacturing services and solutions sector is Hon Hai Precision ( OTCPK:HNHAF ) - better known as "Foxconn." Foxconn is headquartered in Taiwan, as are two other large EMS companies - Pegatron ( OTCPK:PGTRF ) and Wistron . It was the COVID-19 lockdowns and labor unrest at the giant Foxconn plant in Zhengzhou, China - with an estimated 300,000 employees - that was likely the last straw for Apple. As the Wall Street Journal reported on Dec. 3, Apple Makes Plans To Move Production Out Of China . And what better company to profit from that move than Jabil - which already has a very large business with Apple?

Note that Foxconn recently announced November revenue was down 29% from last month and down 11.4% yoy. Meantime, as I have been reporting, Jabil's revenue keeps growing.

Another competitor is Singapore based Flex ( FLEX ). Flex has been an excellent performing company and can certainly assist companies looking to off-shore away from China. FLEX is up 33% over the past year, and its Q2 report in October wa s a top- and bottom-line beat . Revenue of $7.77 billion grew 24.7% yoy - similar to JBL's full-year FY22 revenue growth of 22%.

The following chart compares the stock-price performance of JBL and FLEX over the past three years:

Summary And Conclusion

Jabil has long been a high quality manufacturer for Apple and - with operations in over 30 countries - is in great position to benefit from Apple's quest to diversify its manufacturing operations outside of China. Meantime, Jabil has nicely diversified its operations away from being so dependent on Apple. And in doing so, it has expanded into products like medical devices and EV components that have higher-margin than the typical consumer cell phone business. These products also have long life-cycles. This is why Jabil has continued to grow during the 2022 bear market - and so has its stock. I look forward to the Q1 FY21 EPS report before the market open on Thursday. As I reported in my previous article on JBL, it will likely be more of what investors have come to expect: strong year-over-year revenue growth, strong EPS growth, strong free cash flow generation, and more stock buybacks.

Meantime, despite the 14% rise in the stock over the past 12 months, JBL is still cheap: It trades with at TTM P/E = 10.6x and a forward P/E of only 8.7x. That's extremely cheap for a company that grew revenue by 22% last year while generating $810 million of free-cash-flow last year - which equates to an estimated $5.77/share.

I'll end with a five-year chart of JBL versus the S&P500 and the Nasdaq-100 ( QQQ ) and note that JBL has significantly out-performed both of the broad market averages:

For further details see: