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Jabil (JBL) Up 10.5% Since Last Earnings Report: Can It Continue?

Zacks Equity Research
Heritage Commerce (HTBK) delivered earnings and revenue surprises of -3.45% and -4.89%, respectively, for the quarter ended March 2019. Do the numbers hold clues to what lies ahead for the stock?

It has been about a month since the last earnings report for Jabil (JBL). Shares have added about 10.5% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Jabil due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Jabil’s Q2 Results Benefit From Strong EMS Performance

Jabil reported second-quarter fiscal 2019 earnings of 64 cents per share, which beat the Zacks Consensus Estimate by three cents but decreased 3% year over year.

Revenues increased 14.4% year over year to $6.07 billion that outpaced the Zacks Consensus Estimate of almost $6 billion.

At the end of the second quarter, new business award wins for fiscal 2019 are roughly $2.40 billion. Both healthcare and 5G wireless wins are up $50 million since fiscal 2018-end. Cloud is up 30-40% since the beginning of the fiscal year and automotive business wins met management’s target.

Moreover, during the quarter, Jabil transitioned the first two sites from Johnson & Johnson Medical Devices Companies (JJMDC) as part of the previously announced strategic collaboration between the companies.

Quarter Details

Electronics Manufacturing Services (EMS) revenues (63% of total revenues) surged 33% year over year to $3 billion, driven by strength in retail, industrial, 5G and cloud end-markets.

Diversified Manufacturing Services (DMS) revenues (37% of revenues) decreased 7% year over year to $2.3 billion, primarily due to weak demand for mobility, which is part of Mechanics and Edge Devices & Accessories end-markets.
 
Gross margin on a GAAP basis remained unchanged year over year at 7.5%.

Operating expenses on a GAAP basis declined 10 basis points (bps) to 5%. Selling, general and administrative (SG&A) and research & development (R&D) expenses as percentage of revenues remained flat at 4.7% and 0.2%, respectively.

Moreover, Jabil incurred $13 million of acquisition and integration related expenses.

Non-GAAP core operating margin contacted 20 bps to 3.1%.

EMS core margin declined 100 bps on a year-over-year basis to 2.3%, primarily due to softness in the capital equipment space and costs associated with the ramping up of new business awards. However, DMS core margin improved 110 bps on a year-over-year basis to 4.5%.

Balance Sheet & Cash Flow

Jabil exited the quarter with cash and cash equivalents of $749.1 million compared with $804.4 million in the previous quarter.

In the quarter, cash flow from operations was $199 million, while free cash flow was $28 million.

Jabil bought approximately 6 million shares at average price of $24.35 per share, thereby fully utilizing its $350-million repurchase authorization.

Guidance

For third-quarter fiscal 2019, Jabil expects total revenues between $5.7 billion and $6.3 billion. Revenues are expected to grow almost 10% year over year.

DMS revenues are forecasted to be $2 billion, down roughly 12% year over year. EMS revenues are forecasted to be $4 billion, up nearly 27% year over year.

Core operating income is estimated to be $150-$200 million. The company’s core earnings are expected to be 47-67 cents per share on a non-GAAP basis.

Jabil is focusing on end-markets and product diversification. Management’s target is that “no product or product family should be greater than 5% of operating income or cash flows in any fiscal year.” The diversification will increase reliability of the company’s earnings and revenues.

For fiscal 2019, cloud end-market revenues are expected to be more than $1 billion.

For fiscal 2019, Jabil expects earnings of almost $3 per share on revenues of $25 billion. Adjusted free cash flow is expected around $400 million, up 60% year over year.

For DMS segment, Jabil expects core margin to be 3.7%, up 20 bps despite an anticipated revenue decline of $10 billion. The anticipated strength in healthcare is expected to make up for mobility weakness.

Further, EMS segment is expected to benefit from robust performance of 5G wireless and cloud, while an anticipated decline in enterprise sales is a concern. Continued weakness in semiconductor capital equipment business is expected to hurt EMS margins by 20 bps despite $15-billion higher revenues.

Moreover, for fiscal 2020, revenues associated with the J&J collaboration are expected between $800 million and $1 billion.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -8.33% due to these changes.

VGM Scores

At this time, Jabil has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Jabil has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.



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