2023-12-04 06:50:26 ET
Summary
- Jabil has experienced solid growth and margin expansion over the past decade, having become a much better business.
- Sales performance is showing signs of a cyclical turn, with sales seen down in the fiscal 2024.
- Jabil has reached a deal to sell its mobility business to BYD, which will eliminate its net debt load and improve its financial position.
Towards the end of August, I believed that Jabil ( JBL ) had seen quite a transformation. The company has seen solid growth and margin expansion over the past decade, as the divestment of its mobility business to BYD has eliminated its net debt load altogether.
Despite these great achievements, I was a bit cautious given the momentum displayed by the shares, taking note of the historical cyclical nature of the business (although that has not been seen in recent years). It appears that a cyclical turn is showing up now, at least in terms of the sales performance.
A Great Rise
In the decade long period since 2013, Jabil has seen essentially doubled revenues, reported up from $17 billion that year to $33.5 billion in 2022. Moreover, the company posted operating margins of 4% and change in 2022, which looks low compared to other industries, but is relatively high given the nature of the activities of the business as margins for a long time have only come in at 2-3% of sales.
This margin expansion and sales doubling have been the drivers behind earnings per share advancing from around $2 per share in 2013 to $7 per share in 2022. Quite frankly, shares only started 2023 around the $70 mark, as a 10 times earnings multiple in 2013 has remained the same, despite the great achievements, as investors were arguably fearful about a reversal in terms of sales and margins in lesser economic times.
2023 - Revisited
2023 has been a strong year so far with first quarter sales up 12% to $9.6 billion, although second quarter sales growth slowed down, up 8% to $8.1 billion. By June, Jabil posted a mere 2% increase in third quarter sales to $8.5 billion, with earnings year to date up nineteen cents to $4.86 per share.
Based on the third quarter results, the company guided for full year sales of $34.7 billion, with non-GAAP earning seen at $8.50 per share, with realistic earnings seen around $7.50-$8.00 per share, if we adjust for stock-based compensation expenses. Based on a share count of 135 million shares trading at $115, the company commanded a $15.5 billion equity valuation, or $17.2 billion enterprise valuation if we factor in a net debt load of $1.7 billion.
This debt load would be eliminated overnight as the company reached a deal with BYD Company Limited to sell its mobility business in a $2.2 billion deal. This segment will generate about a $3.8 billion revenue number in 2023, valued at 0.6 times sales, while the entire business was valued at around 0.5 times sales.
Shares rose some $10 per share in response to the deal, adding a $1.3 billion in value. Based on earnings power of $7.50-$8.00 per share and a flattish net debt load, adjusted earnings multiples looked reasonable at 14–15 times, but of course the business has long traded at just 10 times earnings, or thereabouts.
A Mini Boom-Bust
Since September, shares have seen a further boom to $140 in October, but by now have come down to $117 per share, trading at par to the levels at which shares traded by the end of August.
Towards the end of September, Jabil announced the definitive agreement to sell the mobility business to BYD, only to post its fiscal year 2023 results a few days later.
Full year revenues rose from $33.5 billion to $34.7 billion, but fourth quarter sales fell by just over 6% to $8.5 billion. Adjusted earnings for the year improved by nearly a dollar to $8.63 per share, although realistic earnings came in around $8 per share if we adjust for stock-based expenses to the tune of $95 million per annum.
Despite the fall in fourth quarter sales, the company actually grew fourth quarter earnings by eleven cents to $2.45 per share. Net debt was actually down to $1.1 billion, ahead of the BYD deal, looking comforting as the company used its financial position to up its buyback authorization to $2.5 billion.
The company provided a first quarter outlook for the fiscal year 2024, with sales seen between $8.4 and $9.0 billion, with adjusted earnings seen at $2.60 per share, plus or minus twenty cents. Despite the observation that growth came to a standstill, shares advanced further to levels around the $140 mark, doubling from the levels seen early in 2023. This move, given that growth slowed down, made it easy to understand that valuation multiple inflation was the driver behind the share price run, pushing up expectations along the way.
That momentum reversed as the company cut the first quarter guidance, now seeing sales at just $8.3-$8.4 billion. On the positive side, adjusted earnings are seen flattish compared to the original outlook, which is comforting. The softness is attributed to inventory rebalancing, set to continue, which means that second quarter sales are seen down to $7.0-$7.6 billion. This is of course not just inventory balancing, but some pockets of weakness in certain demand areas, such as consumer, digital print, 5G and renewable energy, were cited as well.
Despite this outlook, and the fact that full year sales are now seen down to $31 billion, the company believed that it can stick to a 5.3-5.5% operating margin guidance, resulting in earnings power of around $9.00 per share in 2024. This to me is a testament to the fact that the business has become less cyclical, as higher earnings in a lower revenue environment is a very decent achievement, if of course delivered upon.
And Now?
The 134 million shares of Jabil now trade at $116 per share, now granting the business a $15.5 billion equity valuation, but this now includes about a billion pro forma net cash position following the BYD deal. Factoring this transaction and seeing earnings at $8.00 per share (pre-stock based compensation expenses), earnings multiples have come down to about 13–14 times.
This is a non-demanding multiple given the balance sheet strength and the fact that the business demonstrates on the solid (margin) performance in a downturn here, although the company of course still has to deliver on this.
Amidst all of this I am turning a bit more upbeat, growing more convinced about the business resilience, although sales are of course still coming down, in fact quite a bit. Given all of this, I am gradually turning more upbeat here, but I am looking for a further pullback towards the $100 mark before deciding to pull the trigger.
For further details see:
Jabil: Revenue Cracks, But A Decent Margin Performance