JBL - Jabil Inc.: Poised For Long-Term Growth

2023-06-29 11:28:12 ET

Summary

• Jabil is a worldwide provider of manufacturing services and solutions serving multiple markets.
• The company has long-term growth opportunities driving its current performance and should continue to do so in the coming years.
• Prospective investors should capitalize on this low entry point, as the stock is undervalued.

Investment Thesis

Jabil Inc. (JBL) is a global provider of manufacturing services operating through the Diversified Manufacturing Services [DMS] and Electronic Manufacturing Services [EMS] segments. During the last year, there has been an upward trend in its share price. Additionally, the stock price is outperforming the market, as seen below. Growth in its businesses, such as the cloud, renewable energy, electric vehicles, and healthcare, which provide long-term opportunities for the company, can account for this price movement.

In addition to growth in its business, the Electronic Manufacturing Services market was worth $496.43 billion in 2022 and is projected to reach $1207.98 billion by 2032. This depicts a 9.3% CAGR during the projected period. The industry's anticipated growth provides more room for Jabil to grow. This gets even better as the company's stock is trading at a discount relative to its underlying fundamentals; therefore, I'm bullish.

Company Overview

Jabil is engaged in the provision of manufacturing solutions and services and functions through DMS and EMS, as mentioned earlier. It offers services related to the design and production of electronics; product management; electronic circuit design such as firmware development and quick prototyping; and metal and plastic enclosures design, including electro-mechanics like the Printed circuit board assemblies [PCBA]. Jabil also offers 3D mechanical design, including electro-mechanical, optical assemblies and electronic analysis, mechanism development, tooling management, and industrial design services.

Additionally, JBL provides computer-assisted design services for PCBA design, PCBA design verification and validation, and consulting services. It also provides services involving production test solution development as well as validation services relating to products and processes, such as product systems and safety, reliability tests, and compliance with the regulation. Moreover, it offers the assembly of systems, testing, configuration, and direct-to-order services.

Multiple and Diverse End Markets

Jabil serves multiple unrelated markets with the provision of its products and services. The company serves these markets through two segments: Diversified Manufacturing Services [DMS] and Electrical Manufacturing Services [EMS] . Its business under DMS includes automotive and transport, mobility, healthcare and packaging, and connected devices. Under EMS, it serves industrial and semi-cap, 5G wireless and cloud, print, retail, networking, and storage. Diversification protects investors from market volatility, and since these markets are unrelated, the success of a particular market has no direct effect on another market.

Emerging trends are driving growth across these markets. Some of the trends include the rising demand for renewable energy , automation (AI and machine learning), IoT, circular economy, and digital healthcare, to mention but a few. Jabil is capitalizing on these new market trends by offering solutions shaped by these trends. These emerging trends influence the demand for products and services and create new market opportunities for manufacturing companies like Jabil. JBL's future seems bright, and is positioned for revenue growth in its end markets in the coming years. Getting to specifics, it has immense growth opportunities in 5G and cloud, renewables, electric vehicles, energy storage, and digital healthcare as a result of these trends.

Zooming in, the 5G devices market is expected to grow from about 36.9 billion units this year to 53 billion units by 2028 (with respect to shipment volume) at a CAGR of 7.52% from 2023 to 2028. The global market size is forecasted to reach $2432.87 billion by 2030 from $677.9 billion in 2023, translating to a CAGR of 20% for the projected period. The global renewable energy market size is anticipated to grow to $1998.03 billion by 2030 at an 8.6% CAGR from 2022 to 2030. Moreover, the electric vehicle market is projected to reach 39.2 million units by 2030, exhibiting a CAGR of 21.7% during 2022 through 2030. The digital health market is expected to reach $981.5 billion by 2032, depicting a 15% CAGR from 2023 to 2032. Finally, according to projections, the energy storage market should reach $223.28 billion by 2027, growing at a CAGR of 14% .

As seen above, most of these end markets are expected to experience double-digit growth rates, creating growth opportunities for the company. Given these diverse growth drivers, I believe Jabil is poised for greater revenues in the future.

What of the Numbers?

According to the third quarter of 2023, total revenue was $8.5 billion, representing 2% y-o-y growth. The DMS segment saw revenue growth of 13% y-o-y to $4.35 billion. The increase in revenue was attributed to strength in the healthcare and automotive end markets. As was anticipated by the company, EMS saw an 8% decline in its revenues to $4.1 billion.

GAAP operating income was $375 million, up from $321 million in the same period the previous year. Looking forward, Jabil estimates its revenue for DMS to be $17.8 billion and $16.9 billion for EMS in fiscal year 2023.

Improved Profitability

Let's look at the company's profitability TTM. Jabil recorded an operating income of $1.59 billion , up from last year's $1.28 billion. The net income margin was 2.77%, outpacing the sector's average of 1.99%. Its cash from operating activities of $1.95 billion increased from last year's $1.51 billion and was way higher than the sector's median of $55.56 million. This shows that the company can generate cash from its day-to-day activities. Its ability to generate cash is an attractive quality, especially in its ability to make returns to shareholders, thus creating value for them.

Return on Equity [ROE] is also used to evaluate a company's profitability. JBL had an ROE of 38.4%, which is even more attractive when compared to the sector's average of 0.5%. The company's ROE means it is retaining 61.6% of its earnings, which I think is reasonable. The degree to which profits are retained or reinvested for future development is a key indicator of the company's growth potential. Over the last year, Jabil's earnings grew by 14.3%, outdoing the industry's earnings grew by 10.9%. This shows that the company has been utilizing its profits efficiently.

Over the past five years, the company has also been growing its earnings, as seen above, exceeding the industry and the market.

The company noted that its improved profitability and growth were driven by secular growth in its businesses, such as electric vehicles, cloud computing, healthcare, and renewable energy. Overall, I'm satisfied with JBL's performance and strong returns.

Dividends

For the last 16 years, the company has been paying dividends consecutively. Over the last decade, Jabil has adopted a stable dividend policy maintaining a constant dividend payout. Its quarterly dividend has been $0.08, bringing its annual dividend to $0.32. According to the last announcement , this has not changed, and shareholders were paid a quarterly dividend of $0.08.

The GAAP TTM Dividend payout ratio was 4.51%, lower than the industry's 33.68%. This indicates a large portion of the company's earnings are retained to reinvest in growth opportunities. This means that Jabil is prioritizing its future growth, and considering its growth prospects, I think this dividend stock is suitable for value investors seeking solid growth prospects.

Valuation

According to the updated financial data, JBL seems to be of great value going by relative P/E and P/S valuation metrics. The company is trading at 14.24 and 0.39 times its earnings and sales, respectively. This is well below the P/E and P/S averages for the industry at 24.57 and 2.78, respectively, demonstrating that the stock is undervalued. This is the cue for prospective investors to take advantage of this low entry point. To back this valuation, the Finbox DCF model estimates the company's fair value to be $144.89 plus an upside potential of 40%. The company is currently trading below the estimated fair value, and considering its long-term growth levers, I think Jabil can exploit its potential.

Risks

The company is experiencing a slow market in its semi-cap business. This is a s a result of the slump in consumer demand in the semiconductor industry. This affected the EMS segment revenue in the quarter, which saw a decline from the previous year same period. Despite the EMS market's anticipated growth, it is highly competitive. Its players range from small companies to multinational corporations. Some of Jabil's top competitors include FLEX, SANM , and IPGP , among others.

Conclusion

Overall, Jabil is a great choice for a number of reasons. First, the EMS industry is expected to grow at an annual rate of 9.3% in the coming years. Further, the company has long-term growth opportunities from its diverse end markets, has seen improved profitability, and is trading at a discount to top it all off. Value investors seeking companies with strong growth prospects should consider Jabil.

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