The Bull Case For Jabil Inc.

With Quiver Quantitative’s recent institutional holdings data, we can see that hedge funds and asset managers have been increasing their holdings in Jabil Inc. JBL. Firms such as Fidelity, Point72 Asset Management, and Whale Rock Capital Management have all recently added to their JBL positions. Most notably, Fidelity increased shares held by 15.86% (as filed on 9/30), bringing their total JBL holdings to 10,525,084 shares worth around $1.3 billion dollars at current market prices. With this in mind, we took a closer look at some of the reasons why many investors may be bullish on Jabil Inc.

In December, Jabil reported earnings results for the first quarter of FY24. During the first quarter of FY24, Jabil reported $8.4 billion in net revenue, GAAP EBIT of $303 million dollars, and GAAP Diluted EPS of $1.47/share. Jabil’s management also guided Q2 FY24 results, with projected net revenue of $7 - $7.6 billion, GAAP EBIT of $216 - $301 million dollars, and GAAP Diluted EPS of $0.77 to $1.37/share. As we can see, the second quarter is expected to have weakened earnings due to softened demand. Jabil Inc. CEO Kenny Wilson had this to say about the quarter, “As previously announced, we experienced a broad-based softening in demand during the final stretch of our first quarter, which you can see reflected in our first quarter revenue. Despite softer demand, the team delivered good year-over-year growth in core margins and core earnings per share". With these earnings results and future guidance in mind, we believe that Jabil Inc. is a high quality business and a compelling investment opportunity at current valuations, where we believe that the market is underestimating their long-term free cash flow growth potential due to short-term softening in demand.

Jabil Inc. is a leading global provider of manufacturing services and solutions, specializing in comprehensive electronics design, production, and product management. The company primarily generates revenue by offering services that enable customers across various industries to optimize manufacturing costs, enhance supply chain management, and streamline product delivery. Jabil operates through two main segments: Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). The EMS segment focuses on leveraging advanced IT and supply chain design, catering to industries like 5G, wireless, cloud, and industrial equipment, by producing high-volume electronics rapidly and efficiently. Meanwhile, the DMS segment emphasizes engineering solutions, particularly in material sciences and precision manufacturing, serving sectors such as automotive, healthcare, and connected devices. Jabil's global presence, with facilities in key locations like China, India, and the United States, positions it strategically to meet diverse customer needs and capitalize on business opportunities.

In the manufacturing services industry, Jabil Inc. operates in a highly competitive landscape characterized by both domestic and international players. The industry is defined by a shift towards outsourcing, with companies increasingly seeking external partners for efficient manufacturing, improved inventory management, and access to advanced design and manufacturing technologies. Key competitive factors in this sector include cost-effectiveness, ability to accelerate product time-to-market and scale production rapidly, quality of services, and technological prowess. Jabil competes not only with other manufacturing and design service providers but also faces competition from the in-house manufacturing operations of current and potential customers. Success in this industry hinges on a provider's ability to offer cost savings, advanced technological solutions, quick market entry for new products, and strategic global positioning to meet diverse market demands. We believe that Jabil’s continued success hinges on continuing to meet these competitive factors within their industry, and we further believe that they have done a great job thus far at meeting them.

Jabil Inc.'s strategy for sustained growth revolves around leveraging its position as a leading manufacturing services provider to expand and diversify its offerings and customer base. The company aims to solidify its future as the world’s most technologically advanced manufacturing services provider by maintaining long-term relationships with key customers, particularly in high-growth industries, and expanding its customer-centric business units. Jabil places a strong emphasis on product diversification, focusing on sectors like 5G wireless, cloud, healthcare, and automotive, while also pursuing strategic acquisitions to enhance its capabilities and reach new markets. A cornerstone of its strategy is leveraging its global production footprint to optimize costs and supply chain efficiency, offering tailored manufacturing solutions across various geographies. Additionally, Jabil offers design services and direct-order fulfillment options to enhance product performance and cost-efficiency, further strengthening its competitive edge in the dynamic manufacturing services landscape.

Management is solid, and their capital allocation priorities do a great job of creating long-term shareholder value. Management likes to return excess cash to shareholders via share repurchases. Since FY16, management has repurchased a little over $3 billion dollars worth of common stock. In September of 2023, Jabil’s Board of Directors authorized and amended the 2023 Share Repurchase Program to allow for the repurchase of up to $2.5 billion dollars worth of common stock. As we can see, management has a history of repurchasing shares, with further authorizations that allow for a multi-year runway of additional share repurchases. In addition to repurchases, Jabil also offers quarterly cash dividends on common stock. Since FY16, Jabil has paid out $426 million dollars worth of dividends on common stock. While Jabil offers dividends and repurchases, we are happy to see that they evidently put a larger focus on repurchases. We believe that repurchases benefit shareholders more in the long-term, and it makes sense to repurchase shares at current share prices, given how cheap we believe they are (which we will discuss at the end).

In terms of management incentives, management is incentivized well, with compensation structures that do a great job of retaining talent over the long-term, aligning shareholder and management interests, and incentivizing management to meet critical financial metric goals. The executive compensation structure includes a base salary, short-term incentives, and long-term incentives. Only 10% of CEO compensation is fixed, while only 21% of NEO compensation is fixed, meaning management has a majority (75-90%) of it’s compensation at-risk, paid out based on how they meet important financial metric goals. Equity rewards are paid out in the form of PSUs (performance stock units), which are based on predetermined thresholds of EPS and TSR (total shareholder return). In FY23, annual cash incentive thresholds were based on corporate core operating income (Non-GAAP EBIT), corporate core operating income margin (Non-GAAP EBIT margin), and corporate free cash flow (Non-GAAP FCF). These are all great thresholds that relate heavily to the business and its growth, and we believe that management is appropriately incentivized to meet them.

Jabil is a very efficient business. The business currently operates at a LTM ROE of 31.1% and a LTM ROIC of 27.4%. With a WACC of 8.7%, Jabil currently operates at a ROIC to WACC ratio of 3.15x, showcasing the business’ ability to generate high returns on capital relative to the business’ weighted average cost of capital. Businesses that are able to generate high returns on capital, especially relative to WACC, are known as compounders, businesses that are able to rapidly compound earnings and intrinsic value over the long-term (much to the delight of passive, long-term shareholders). Looking further, we can see stellar sustained growth in EBIT (operating income) and incremental EBIT margin expansion over the last decade. Operating income does a great job of diving into the profitability of a businesses core operations, and positive growth trends in this metric can show long-term operational efficiency and improvements. Since 2014, Jabil has grown operating income at a CAGR of 18.4%, with EBIT margins expanding from 1.9% of revenue in 2014 to nearly 5% of revenue today (LTM EBIT margin).

Analyzing Jabil’s income statement, we can see some stellar sustained growth in revenue, gross profit, and earnings within the last decade. Since 2014, Jabil has grown revenue at a CAGR of 8.2%, with gross profit growing at a CAGR of 10.8% in that same time period. This excess growth in gross profit relative to revenue can be explained by incremental gross margin expansion. In 2014, Jabil operated at a gross margin of 6.5% of revenue, compared to today where the business operates at a gross margin of 8.7% of revenue (LTM gross margin). In terms of earnings, Jabil has grown EBITDA at a CAGR of 12.4% since 2014, with EPS growing at a CAGR of 17.9% in that same time frame. The growth in EPS can largely be explained by share repurchases. Jabil is a cannibal, decreasing shares outstanding by 33% since 2014.

Looking at Jabil’s balance sheet, we can see that the business operates in sound financial health. The business currently holds $1.55 billion dollars worth of cash and equivalents on the balance sheet, paired with around $2.88 billion dollars worth of long-term debt and no short-term borrowings. We believe that this long-term debt to cash ratio is very manageable, with a net debt of around $1.7 billion dollars (0.64x LTM Net Debt / EBITDA). In terms of business solvency, Jabil operates at an EBIT / interest expense (interest coverage ratio) of 7.81x, meaning that the business generates $7.81 of operating income for every dollar of interest expense incurred by the business’ debt. As we can see, Jabil has more than enough runway to cover its long-term debt obligations. It is a good trait for high quality businesses like Jabil to have manageable debt loads, as the business can focus on initiatives that generate value for shareholders, like dividends, share repurchases, and/or reinvestments back into the business at high rates of return.

Analyzing Jabil’s cash flow statement, we can see some stellar sustained growth in net income and free cash flow within the last decade, showcasing the business’ long-term operational improvements and efficiency. Since 2014, Jabil has grown net income at a CAGR of 13%, with free cash flow growing at a CAGR of 32.4% since 2019*. We decided to use 2019-present free cash flow data as free cash flow was negative in 2014 and 2016-2018, and we wanted to showcase the growth in free cash flow within the last few years. In 2019, free cash flow margins were a tiny 0.7% of revenue, compared to today where the business operates at a LTM free cash flow margin of 3% of revenue. While these FCF margins are tiny, Jabil as a whole is a low-margin business, and margin expansion across the board signifies strong financial performance ahead. FCF margin expansion can act as a catalyst for future free cash flow generation, which the business can then use to repurchase shares, reinvest back into the business at high rates of return, or offer/increase a dividend. The best high quality compounding businesses are able to generate large amounts of cash that can be put towards initiatives that add lots of value to the business and shareholders. 

After conducting a reverse discounted cash flow analysis on Jabil Inc., we can see that the business is trading at share prices that imply a 1.9% growth rate (CAGR) in free cash flow over the next ten years, using a perpetuity growth rate of 3% (largely in line with US GDP growth) and a discount rate of 8.7% (Jabil’s WACC). We believe that Jabil is a very high quality business, and we further believe that this valuation is cheap and future free cash flow generation consensus is lower than it should be. While Jabil has had shaky free cash flow generation in the past (namely, 2014 to 2016-2018), free cash flow has been very stable since 2019, with high growth rates (30%+ CAGR) and strong free cash flow margin expansion during that time frame. While past performance is not indicative of future results, we believe that a fair FCF growth rate going forward is 5%, which implies a return of 23.2% and an implied share price of $157/share. Essentially, we believe that a fair price for the stock is around $157/share. High quality businesses like Jabil rarely trade below their “fair value” (which can have lots of different meanings), and we believe this could signal a great entrance opportunity into a high quality business. Please note that these valuations and projections are based entirely on our proprietary models, and we encourage all investors to do their own due diligence before investing into Jabil Inc., as your analysis may lead to an entirely different viewpoint on the business.

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This article is from an external contributor. It does not represent Benzinga's reporting and has not been edited for content or accuracy.