JBL - Jabil: What A Transformation!

2023-08-31 17:44:13 ET

Summary

• Jabil Inc. has seen strong growth over the past decade, doubling sales and achieving higher margins.
• The company's recent divestment of its mobility business to BYD Company Limited for $2.2 billion has eliminated its net debt at a decent price.
• Despite the strong performance, I remain cautious about getting involved due to the share price momentum and historical cyclical nature of the business.

It has been over a decade ago since I last looked as shares of Jabil Inc. ( JBL ) . In fact, it was early 2013 when I believed that shares were vulnerable to setbacks, as the company announced a substantial $665 million deal for Nypro, a provider of manufactured precision plastics products in a variety of industries.

Believing that Jabil was a cyclical player, the company has seen very strong growth over the past decade. In fact, the business has doubled sales, it has seen sequential growth, higher margins and bought back a lot of stock, rightfully sending shares a lot higher. While the prevailing multiples remain very reasonable, after a substantial and interesting divestment, I fail to want to get involved here after very strong share price performance. Shares however certainly deserve a place on the watch list.

A Recap

The Nypro deal in 2013 was significant, as Jabil would add about a billion dollars in sales, while net debt would essentially double to $1.3 billion. Despite the substantial revenue contribution, the deal hardly had an impact on Jabil, which generated about $17 billion in sales, although the net earnings were relatively modest at $400 million, as the nature of the (contract manufacturing) activities meant that these are typically low-margins activities.

With shares trading at $20, trading at just 10 times earnings, the valuations looked quite reasonable, but there was the cyclicality of the business and the low margin nature of the business, as the company actually reported substantial losses during the great recession a few years before.

It was this relatively recent observation and the cyclicality which made me cautious, but amidst a booming economy in the decade which followed, certainly in the areas in which Jabil shows strength, it turned out to be a much too cautious take.

First Caution - Than Enthusiasm

Shares of Jabil traded in the $20s until 2019, when shares broke the $30 mark in the summer of that year. Trading at $40 pre-pandemic, shares since have seen a huge rise, with quite frankly a lot of these gains taking place this year. Shares ended 2022 at $70 per share and are by now trading at $115 per share, within imminent reach of the all-time highs.

By September 2022, Jabil posted its results for the fiscal year 2022. For the year, the company has grown to a $33.5 billion revenue base, having essentially doubled sales over the past decade. The company posted operating profits of $1.4 billion, for margins of 4.2% of sales, historically a solid achievement.

Net earnings came in at $996 million, just a couple of pennies shy of the $7 per share mark. Not only have these margins risen from a historical range of 2-3% of sales, and has the company displayed on sequential revenue growth, the company cut the share count by a third as well over the past decade!

Net debt of $1.4 billion was relatively modest, with EBITDA posted around $2.3 billion, translating into a very modest leverage ratio. Despite earnings power of $7 per share, the company only traded at 10 times earnings, which was relatively modest, as a traditional cyclical and volatile business has turned out to be a solid long-term value creator.

2023 - Solid So Far

Despite increased uncertainty in the global economy, the company posted a solid 12% increase in first quarter sales to $9.6 billion, amidst resilient margins, with some restructuring charges were taken. Second quarter sales rose by less than 8% to $8.1 billion, with margins again being resilient, although progress on the bottom line was more limited due to higher interest expenses. In June of this year, Jabil announced a mere 2% increase in third quarter sales to $8.5 billion.

Net earnings to date are largely flattish, actually down a bit in dollar terms, yet earnings per share are up $0.19 per share to $4.86 per share on the back of a higher pace of share buybacks, with the share count down to 135 million shares, while $1.7 billion in net debt remains quite manageable.

For the year sales are now seen at $34.7 billion with so-called core earnings, a non-GAAP metric, coming in around $8.50 per share. That number is a bit too optimistic, as it excludes for stock-based compensation expense, with realistic earnings seen anywhere between $7.50 and $8.00 per share.

With 135 million shares trading at $115, the company commands a $15.5 billion equity valuation, and $17.2 billion enterprise valuation.

A Significant Sale

This net debt load (and some more) would become completely eliminated as the company reached a preliminary deal with BYD Company Limited (BYDDF) late in August. Under the deal terms, Jabil would sell its mobility business to BYD in a $2.2 billion deal. Few details were announced on the transaction other than the price.

The third quarter earnings presentation revealed that Jabil expects that the mobility segment will generate $3.8 billion in sales in 2023, actually down 3% on the year before. With the business fetching a 0.6 times sales multiple, with the entire business trades around 0.5 times sales, this looks like quite a fair deal, certainly as these involve Chinese assets.

Note that the sales comparison comes after shares of Jabil have risen some $10 per share, nearly 10% in response to the deal, adding approximately $1.3 billion in value to the business on the back of a $2.2 billion deal! With net debt being evaporated, and still working with a $7.50-$8.00 per share earnings number, shares trade at a very reasonable 14-15 times multiple.

A Final Word

The calculations above reveal a modest earnings multiple for an unleveraged business, and while Jabil has been an excellent and stable growth play, the company likely deserves a higher multiple, after traditionally being regarded as a cyclical play.

Hence, I can only congratulate management, long-term investors, and personally fellow author @Michael Fitzsimmons for being a long term and rightful bull on Jabil Inc. Given the strong share price moment, I am not compelled to get involved, even as valuations remain reasonable, but definitely I am placing shares on my watch list.

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