When it comes to Jabil Inc. (NYSE:JBL), the numbers don’t lie. This global manufacturing services company has been experiencing significant market share gains and continuously expanding both its revenue and profit margins. What’s driving this success? Jabil’s strategic partnerships with industry leaders like Tesla, Johnson & Johnson, and Amazon Web Services have played a crucial role in its growth. Additionally, its involvement in the renewable energy sector has proven to be robust. As JBL generates more cash flow, it is expected to engage in substantial share buybacks. With a price-to-earnings ratio of around 13 times forward PE, significantly below the sector median, Jabil is trading at an attractive valuation.
The Review and Outlook for F4Q23
In the fourth quarter of 2023, Jabil surpassed earnings expectations and achieved revenue levels within its guidance range, exceeding gross margin projections. However, what caught investors’ attention was Jabil’s long-term guidance. Despite selling its Mobility business to BYD Electronic, Jabil’s outlook remains positive. With a shift towards higher-growth and higher-margin segments like Industrial & Semi-Cap, Auto & Transportation, Healthcare & Packaging, and 5G Wireless & Cloud, Jabil is well-positioned to offset the revenue decline from the Mobility business sale. This positive outlook also comes at a time when Jabil is reducing its customer concentration risk with Apple, historically responsible for around 20% of its revenue.
Furthermore, Jabil’s transition to the consignment model for its cloud business has the potential to boost margins as it starts shipping AI server racks to Amazon. The company’s automotive, renewable energy, and healthcare businesses are also expected to experience robust growth thanks to trends like electric vehicle adoption, the energy transition, and medical outsourcing.
The Impact of Mobility Business Sale to BYD
Jabil’s decision to sell its mobility business to BYD Electronic opens up opportunities for portfolio enhancement and financial flexibility. By decreasing its exposure to the cyclical consumer electronics sector, Jabil can allocate additional capital to support the growth of its high-margin businesses with longer product lifecycles, such as automotive, renewable energy, and healthcare. The company’s shift to a consignment model for its cloud business is expected to further boost profit margins. The funds generated from the sale could also accelerate Jabil’s share repurchase program, as it has recently increased its authorization to $2.5 billion.
Strategic Shifts in Production to Address Supply Chain Challenges
In response to significant supply chain challenges causing shortages and increased logistics costs, companies are increasingly considering relocating production facilities closer to their end customers. Jabil, with its strong global presence, is well-positioned to attract customers looking to diversify their manufacturing operations. The company is also actively involved in value-added projects and making strategic technology investments in areas like AI, ML, and robotics. These investments contribute to the expansion of profit margins and the generation of free cash flow.
The Healthcare Division as a Driver of Revenue and Growth
Jabil’s healthcare division is expected to be its largest revenue contributor and a consistent growth driver. Strong relationships with key clients like Johnson & Johnson ensure a steady flow of outsourcing orders for medical devices. The increasing demand for connected healthcare offers even more growth potential. As the customer base expands, Jabil’s healthcare division could present broader opportunities in areas like diagnostics and pharmacy-related products. Collaborations with partners like Johnson & Johnson, E3D, and Elvie provide access to a broader range of medical devices and new business opportunities. Jabil’s Caribbean manufacturing facilities further improve economies of scale and reduce costs in this business.
Valuation and Investment Outlook
Currently trading at a forward PE of 13x, JBL is undervalued compared to the sector median of 21x. While ongoing global inflation may put pressure on Jabil’s consumer electronics exposure, the rising contribution of margin-accretive businesses like healthcare and 5G/cloud should help grow earnings and potentially drive the stock’s valuation higher over time.
Given Jabil’s shift towards higher-growth and higher-margin sectors, the divestiture of its Mobility business, and its strong earnings growth potential, the stock has significant upside. With a positive outlook, expanding profit margins, and disciplined capital allocation, Jabil’s shares deserve a higher valuation. While a specific target price is not provided, the company’s growth and prospects justify a buy rating.
Investment Risks and Conclusion
Jabil’s heavy reliance on its top five customers for over 40% of its total revenue poses a financial risk if any of these key customers reduce their purchases or end their business relationships. Additionally, the demand from end customers can be volatile, tied closely to specific product lifecycles, and production schedules are often short-term. Intense rivalry in certain market segments due to low barriers to entry and minimal switching costs also presents competition challenges.
In conclusion, Jabil’s sale of its Mobility business and its diversified business model position it for future growth. With trends favoring outsourcing, gaining market share, and sustained growth in sectors like electric vehicles, digital healthcare, energy, and AI-driven cloud data centers, Jabil is likely to outperform the market in the coming years. Therefore, a buy rating is assigned to the stock.
