BYDDY - Jabil: Dissecting Buybacks On FY24 $1 Billion FCF Estimate

2024-01-04 00:17:08 ET

Summary

• Jabil stock was up 89% last year - more than triple the returns of the S&P 500.
• However, the stock went on a roller coaster ride in Q4. That was due to a number of factors - including the issuance of weaker-than-expected guidance.
• That said, the setup for Jabil in FY224 is excellent: the company expects adjusted earnings of $9/share and FCF generation of $1+ billion.
• In addition, Jabil has accelerated its $2 billion buyback plan, and its cash position after the divestment equates to an estimated 20% of its market cap.
• Meantime, the JBL was added back to the S&P500 in December. The stock could easily hit $150 this year (+17%) and will still have a P/E of only 16.7x. JBL is a BUY.

Jabil (JBL), a Florida-based leading global provider of electrical and manufacturing services & solutions, is one of my favorite technology picks. The stock was up 89% last year - more than triple the returns of the S&P 500. However, during Q4, the stock went on a roller-coaster ride after breaking out from the mid-$80s in June (see graphic below). Much of that volatility was likely due to uncertainty surrounding the company's $2.2 billion divestment of its Mobility Segment to BYD ( BYDDY )( BYDDF ) and the company's significant cut in forward guidance that was issued in late November. Meantime, a bullish factor was that Jabil rejoined the S&P 500 in mid-December following a 7-year break. Today, I'll dig down into Jabil's share buyback plan in light of the company's divestment, forward guidance, and its forecast to generate $1 billion in free cash flow this year.

Investment Thesis

As I have been reporting on Seeking Alpha, the investment thesis for Jabil has been all about margin expansion, its strong free cash flow profile, and the company's plan to return capital to shareholders via a very strong share buyback plan.

In late August of last year, Jabil announced it was selling all of its Mobility Segment to BYD for $2.2 billion (see What The $2.2 Billion BYD Deal Means For Jabil Shareholders ). This was a transformational deal for Jabil because the Mobility Segment was expected to generate $3.8 billion of revenue in FY23 (or ~11% of total revenue).

In addition to the big cash infusion, moving forward, the transaction had three more primary benefits:

• It further reduced Jabil's dependence on Apple ( AAPL ), which was 17% of total revenue in FY23 (down from 22% in FY21).
• The Mobility Segment was a relatively low-margin business and not growing nearly as fast as Jabil's other opportunities (like EVs and Health Care).
• It further reduced Jabil's reliance on China-based supply chains.

The BYD Deal Closes Early

The transaction with BYD was expected to close on January 28th and management had previously issued forward guidance based on that date. Instead, Jabil and BYD were able to close the deal on December 29. As a result, Jabil reissued guidance based on the earlier close (i.e., roughly one less month of revenue contribution from the Mobility Segment):

For Q2:

For FY2024:

As can be seen in the graphic, and as should have been expected, Q2 guidance was significantly and negatively impacted (i.e., about a month's less revenue/earnings from the early close of the transaction). However, in my opinion, shareholders should be more focused on the full-year FY24 guidance that expects only a slight dip in total revenue while non-GAAP earnings were still expected to be $9.00+/share and adjusted free cash flow generation of $1 billion.

In that light, let's look at the company's share buyback plan.

Share Buybacks

On the Q1 conference call in December, Jabil CFO Mark Dastoor gave an update on the company's share buyback plan:

In Q1, we executed the previously mentioned $500 million accelerated share repurchase. In September, we originally expected to do a series of accelerated buybacks totaling $1.7 billion in FY ‘24 and $800 million in FY ‘25. We now intend to execute a series of accelerated buybacks of the entire $2.5 billion repurchase authorization in FY ‘24 .

Dastoor also reported that Jabil expected to have lower interest expense and working capital due to the transaction - both of which helped the company keep guidance for full-year core adjusted earnings at $9/share.

Dastoor went on to add more color on share buybacks, pointing out that the $500 million in September buybacks was the biggest buyback JBL had ever done in a single quarter. In addition, Dastoor said the company intends to pull forward the remaining $2 billion in share buybacks and complete all of it in FY24.

The Jabil team thinks now is a good time to accelerate the buyback because there is a general slowdown going on in its markets and - despite the strong run in the stock's price - the team feels JBL stock is still highly undervalued and that buybacks are the best return it can get from its strong free cash flows. In addition, Dastoor said the combination of stock buybacks and lower interest expense "could pick up $0.40, $0.50 (per share) quite easily".

Valuation

Jabil ended Q1 (the quarter ended Nov. 30th) with $1.55 billion in cash and cash equivalents. Adding in the $2.2 billion cash infusion from the BYD deal, and subtracting ~$200 million for costs associated with stock-based compensation, restructuring, severance, and related charges, and all things being equal (but acknowledging they seldom are ...), JBL's cash balance would theoretically reach $3.55 billion (prior to completing the $2 billion of remaining stock buybacks planned for FY24 and not including any addition free cash flow generation so far in Q2).

Now, Seeking Alpha currently reports JBL's market cap to be $16.5 billion . The theoretical $3.55 billion cash balance would therefore equate to a whopping 21% of JBL's market cap. And remember, that doesn't even include three quarters (i.e., Q2, Q3, Q4) worth of free cash flow yet to come. And, on that note, and considering JBL only generated $173 million of FCF in Q1, its FY2024 free cash flow generation guidance of $1 billion is clearly and strongly back-end loaded.

The point here is that JBL can not only easily afford to complete the $2 billion left in its current buyback authorization in FY24, but in lieu of its strong cash position and its FCF profile going forward, it would not surprise me in the least if the company announces another meaningful share buyback prior to the end of FY24.

Meantime, JBL trades at a TTM P/E of 21.8x (a significant discount to the S&P 500 P/E = 26.2x ) and a forward P/E of only 14.1x.

Bottom line: given JBL's strong cash position, rising margins, the meaningful share buyback plan as a percentage of its market cap, and its strong free cash profile moving forward, I agree with the management team: JBL stock remains significantly undervalued.

Risks

Risks to the thesis are that JBL's growth profile could slow down and it doesn't achieve its revenue, earnings, and free cash flow guidance. However, after following the company for a few years, my observation is that JBL management typically under-promises and over-delivers.

That said, on the previously referenced Q1 conference call, management took a hit from some of the analysts for being late to announce a slowdown relative to some of its peers. JBL management strongly pushed back on that narrative and said it was very closely engaged with its customers. Regardless, and as can be seen from the stock price chart at the top of the article, the big drop in the stock price after the reduced guidance announcement was a great opportunity for management to "double-down" on its share buybacks and take advantage of the stock's big slide. We will learn on the Q2 report how much stock the company bought back and, more importantly, at what price.

Summary & Conclusion

The BYD deal was a transformation for Jabil in that it significantly reduced its dependence on Apple (the business made case enclosures for Apple iPhones, among other related products), reduced its reliance on China-based supply chains, and jettisoned a relatively low-margin business that wasn't growing as fast as some of its other segments. That being the case, the deal reinforced Jabil's margin expansion thesis and thus its free cash flow profile. Meantime, the earlier-than-expected close of the transaction and the cash infusion have enabled the company to accelerate its strong buyback plan. According to my analysis, post the close of the BYD deal, Jabil's cash position equates to an estimated ~20% of the company's entire market cap (ignoring any buybacks after the close of Q1 and any additional free cash flow generated so far in Q2).

I reiterate my BUY recommendation on JBL. The stock could easily hit $150/share this year (+17%), which - based on $9 of adjusted earnings - would equate to an estimated P/E of only 16.7x, still a significant discount to the S&P 500.

I'll end with a 5-year total returns comparison of JBL compared to the S&P 500 and Nasdaq-100 as represented by the ( VOO ) and ( QQQ ) ETFs and highlight Jabil's extreme outperformance in comparison to the broad market averages. Also note that Jabil is outperforming so far this year during profit-taking and a general sell-off in the technology sector: at pixel time (10 am EST Wednesday), the stock is currently up $1.50 while the Nasdaq-100 is -0.50%.

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