QQQ - Jabil: Treat Yourself And Buy The 10% Dip

2023-04-24 13:10:54 ET

Summary

• For no apparent reason, the stock of manufacturing services company Jabil is down nearly 10% so far in April.
• Yet JBL's earnings report in March was a beat and the company is excellently positioned to benefit from off-shoring manufacturing away from China.
• Meantime, Jabil is using free-cash-flow to buy back shares that are relatively undervalued (forward P/E = 9.4x).
• As a result of steady revenue and margin growth, and a reduction in the share count, JBL's EPS and FCF/share are growing faster than revenue.
• Buy the dip in this Florida-based electronics & manufacturing services company and note that JBL has significantly outperformed the S&P 500 & Nasdaq-100 over the past 3 years.

The stock of Florida-based Jabil Inc. ( JBL ), an electronics and manufacturing services company that counts Apple ( AAPL ) among its biggest customers, is down close to 10% so far in April (see below). However, there is no apparent reason for the drop - at least not that I can find. Meantime, earnings and free-cash-flow remain strong and the company continues a meaningful share buyback program that - unlike many technology companies - is actually and significantly reducing the outstanding share count. That being the case, investors that don't already have exposure to this great American company should consider buying the recent dip.

Investment Thesis

Although Apple is still Jabil's largest single customer ( 19% of revenue in FY2022 ), that is down 2 full percentage points from FY2020 and the company has done a great job of diversifying its operations into many other lines of business while at the same time putting a priority on achieving higher margins. The slide below was taken from the last month's Q2 FY23 Presentation :

As can be seen in the graphic, over the past few years, Jabil has diversified and now operates 8 businesses and now has a roughly 50/50 revenue split between its Diversified Manufacturing Segment ("DMS") and its Electronics Manufacturing Segment ("EMS"). Note that its fastest growing businesses in Q2 were Auto & Transportation, Industrial & Semi-Cap, and Healthcare & Packaging. The company is also diversified geographically, and is in an excellent position to win business that is off-shoring away from China.

As a result of this diversified portfolio, Jabil is a much more resilient and recession resistant company as compared to years ago when it was arguably overly dependent on Apple for a large percentage of its revenue. Meantime, overall margin continues to creep higher as the shares outstanding continue to fall due to the company's share buyback plan. As a result, JBL's per share earnings and free-cash-flow are growing faster than overall revenue growth.

Earnings

The Q2 EPS report last month was strong, a top- and bottom-line beat , and much of what investors have come to expect from Jabil over the past few years:

Net revenue increased 10% yoy (during a challenging 2022 market), core operating margin increased 15% yoy, and core operating earnings increased 16% yoy. Adjusted free-cash-flow was $110 million.

Strength in the Automotive, Healthcare & Packaging, and Industrial & Semi-Cap businesses outweighed relatively weak results in its Connected Devices, 5G Wireless & Cloud, and Mobility businesses. That fact shows the strength of Jabil's new and more diversified portfolio.

Shareholder Returns

In Q2, Jabil continued its strategy of using its excellent free-cash-flow generation to execute its strong and steady share buyback plan. During Q2, JBL bought back $127 million in stock. As mentioned before, and unlike many technology companies that use share buybacks as a way to merely counteract massive employee stock option grants, JBL's share buyback plan has significantly reduced its outstanding share count.

Indeed, according to the company's FY2022 Annual Report, the outstanding share count as of October 17, 2022, was 134,638,571 . That compares to 143,334,977 shares outstanding as of October 14, 2021, and 149,550,360 shares as of October 14, 2020.

That is, JBL has reduced its outstanding shares by nearly 10% over the past two years alone. The combination of rising revenue, increasing margin, and a reduced share count is the primary investment catalyst for JBL shareholders.

This is the primary reason Jabil's stock has significantly outperformed the S&P 500 and Nasdaq-100 over the past 3-years (see graphic below).

Going Forward

Jabil's forward guidance for full-year FY23 continues to be bullish:

As can be seen, Jabil's core operating margin is expected to be 4.9% in FY23, up 30 basis points as compared to last year. Core EPS is expected to come in at $8.40/share (+9.8% yoy) while free-cash-flow is expected to grow 11% yoy to $900+ million.

On the development side, Jabil continues to innovate and recently announced it has teamed with KAV Sports to deliver made-to-order, personalized bicycle helmets. The KAV helmets deliver superior fit, comfort and protection by using custom engineered materials and additive manufacturing (i.e. 3-D Printing). Time Magazine recognized the helmets as one of the “best inventions of 2022”.

Last month, Jabil announced that its photonics business unit launched a new Active Optical Cable family to address optics-enabled networks and data center architectures while supporting the ongoing boom in artificial intelligence, cloud, high-performance computing, and machine learning applications. The new 800G Active Optical Cable product addresses rising demand for low-cost, high-performance, short-distance interconnects.

Summary & Conclusion

Jabil continues to be one of my favorite growth stocks. Not because the company's revenue is growing so fast, but because steady revenue growth combined with steady margin growth and strong share count reduction has led to EPS and free-cash-flow per share metrics that are growing significantly faster than revenue. And that is why JBL stock - despite the 2022 bear-market in the technology sector - has significantly outperformed the broad market averages as represented by the Vanguard S&P 500 ETF ( VOO ) and Nasdaq-100 Trust ( QQQ ) over the past 3-years:

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