Jabil Stock Stumbles Into Its Q3 Earnings Report (NYSE:JBL)

kr7ysztof/E+ via Getty ImagesJabil (NYSE:JBL) – the supposed “Best Kept Secret On Wall Street” according to yours truly – badly disappointed when Q2 earnings were released back on March 15. As a result, the stock dropped some 16% on the day. And despite a valiant attempt to regroup and rally, the stock closed Thursday at $121 and change (see chart below). That’s down 23% from Jabil’s “stock buyback” propelled 52-week high of $157. A month later CEO Kenneth Wilson was placed on paid leave “pending completion of an investigation related to corporate policies,” according to a company statement. A month after that, the company announced that CFO and interim CEO Mike Dastoor was taking over as CEO. Dastoor is a well respected 24-year Jabil veteran. That was a lot of drama for a company that had heretofore appeared to be strong-n-steady and one that typically under-promised and over-delivered. It certainly undermined my own personal confidence in the company. Indeed, I sold 25% of my shares following the report – my first ever sale of JBL stock. Today, I’ll review Q3 earnings estimates and offer my opinion on Jabil’s prospects going forward. The Q3 results are due out before the market opens on June 20 (next Thursday). YChartsInvestment Thesis Prior to the Q2 EPS report, Jabil had a solid history of beating quarterly estimates, delivering meaningful margin expansion, and generated strong free-cash-flow. Indeed, over the past five years Jabil has been beating the pants off the major market indexes as represented by the (VOO), (DIA), and (QQQ) ETFs: Data by YChartsJabil operates two segments: Electronics Manufacturing Services (“EMS”) and Diversified Manufacturing Services (“DMS”). I have pointed out in my continuing coverage of Jabil on Seeking Alpha (see this article for instance) that the company has been diversifying operations away from its low-margin Apple (AAPL) business into higher margin contracts in the healthcare, industrial and semi cap, automotive (i.e. EV), and data center end markets. Apple accounted for 28% of revenue in 2018, and that was down to 17% of revenue in FY2023. Amazon (AMZN), another large customer, had been hovering around 10% of revenue (11% in FY2022), but dropped below the 10% reporting threshold last year. As I pointed out in the “Best Kept Secret” article referenced earlier (in which I at least downgraded the stock from Buy to Hold), Jabil shed its low-margin Mobility Segment to BYD Electronics (OTCPK:BYDDY) at the end of last year. The Mobility Segment primarily made casings for Apple’s mobility products. As a result of the transaction, Jabil announced it planned to use the majority of the $2.2 billion in proceeds to begin an accelerated stock buyback plan. (For more on that transaction, see What The $2.2 Billion BYD Deal Means For Jabil Shareholders.) Indeed, on the Q2 conference call in March, we learned that Jabil bought 6.5 million shares for $825 million during the quarter – that’s an average price of $126/share. As of Feb. 29, that left $1.2 billion remaining on the company’s current repurchase authorization. Note the $1.2 billion left on the repurchase authorization equates to 8.2% of the company’s current $14.6 billion market-cap. JBL ended Q2 with $2.6 billion in cash. Q3 Earnings Estimates According to Yahoo Finance, the current consensus EPS estimate for Q3 is $1.85/share: Yahoo FinanceThat compares to $1.99/share in the year earlier quarter, but remember – Jabil jettisoned its Mobility Segment to BYD. For the year, the consensus is for EPS of $8.37, which at Thursday’s closing price equates to a forward P/E = 14.5x. While that’s a big discount to the S&P 500, a better comparison is competitor Flex (FLEX), which currently has a forward P/E = 13.4x. In the “old days” (i.e. prior to the short-term reign of CEO Kenneth Wilson …), I would have had a high-degree of confidence in Jabil’s earnings estimate. However, given the messy CEO transition and combined with a slowdown in multiple end-markets, I’m less confident these days. The relatively weak and sideways movement in the stock price over the past month (shares are currently below the 200-day moving average of $126) reinforce my lack of confidence considering Jabil used to trade at a relative strength higher than the broad S&P 500 and now the stock is lagging. That said, it’s possible the stock is simply consolidating after a strong multi-year run and making a base prior to the next move higher. Going Forward Prospects going forward appear mixed and somewhat hazy. I say that because even though Jabil reiterated its previous FY2024 guidance on May 20, it withdrew guidance for FY2025 and in press release CEO Dastoor said: … FY24 has been a year of change for Jabil, as we divested our Mobility business and plan to utilize most of the net proceeds to repurchase shares. Meanwhile, some of our end markets such as renewables, 5G, semi-cap, and electric vehicles have weakened. So while the company reiterated its previous FY2024 guidance (see bullets below), the lack of visibility and confidence in the company’s outlook going forward is notable – at least for those of us who have followed the company for a few years. Core margins of 5.6% Core diluted earnings per share of $8.40 Generation of $1+ billion in adjusted free-cash-flow That said, Jabil should be ideally positioned to take advantage of secular growth opportunities in AI data center hardware, renewable power and energy infrastructure, EV and hybrid vehicles, and healthcare. For example, on the Q2 conference call referenced earlier, Jabil reported “our AI GPU volume in the first half of 2024 is 200 times that of the level of 2023. So there’s a lot to be excited about as we look a little bit further down the road.” The company’s strong free cash flow profile should enable continued investment in leading-edge manufacturing and logistics technology for the future while at the same time returning cash to shareholders via stock buybacks. As a slide from the Q2 presentation shows, the key is for the company to continue its impressive track record of core operating margin expansion: JabilIn comments to my articles on Jabil, many investors have observed that “5.6% margins are terrible” and in comparison to companies like Google and Broadcom, I certainly agree. However, for a manufacturing services company like Jabil, it’s a big improvement of its historical financial returns. And while a 60 basis point year-over-year increase may not seem like a big deal, spread out over $28.5 billion in expected FY24 revenue, that’s an incremental $171 million year-over-year expansion in margin. Or, an estimated $1.34/share based on 126.9 million average diluted shares outstanding at the end of Q2. Steady revenue growth and margin expansion had been the key to Jabil outperforming the S&P 500 and even the Nasdaq-100 over the past five years (see earlier chart). However, in FY2024, we’re seeing revenue decline. Summary and Conclusion The strong long-term upward trajectory in Jabil’s stock price was halted by the weak Q2 report combined with the C-suite drama. Jabil is experiencing revenue declines in multiple sub-sectors and there’s a lack of visibility and a palpable lack of confidence going forward. That said, management is confident of continued strong free cash flow generation for the rest of FY2024 (i.e. the next two quarters) and is sticking by previous guidance that it will generate more than $1 billion in adjusted free cash flow this year. Combined with the $2.6 billion in cash the company had at the end of Q2, there’s no reason the stock buyback cadence should not continue. That should help buoy the shares through the revenue weakness. However, the lack of visibility and confidence for FY2025 leads me to reiterate my Hold rating. I’ll end with a slide from the Q2 presentation that shows the expected revenue deterioration in various end-markets and note that – in the big picture – estimated FY2024 total revenue of $28.5 billion is expected to decline by ~$6.2 billion year-over-year. That’s substantially more than the $4 billion in FY23 revenue loss from the Mobility Segment disposition: Jabil Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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