It has been about a month since the last earnings report for Jabil (JBL). Shares have added about 2.4% 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 Q4 Earnings Beat Estimates, Revenues Up Y/Y
Jabil reported fourth-quarter fiscal 2019 earnings of 88 cents per share, which beat the Zacks Consensus Estimate by a couple of cents and improved 25.7% year over year.
The earnings figure was within management’s guided range of 76-96 cents per share on a non-GAAP basis. Jabil incurred a one-time charge of $6.2 million due to a distressed customer in the networking space.
Moreover, the company exchanged $50 million of iQor preferred stock associated with its divestiture of the aftermarket services business in 2014. The exchange resulted in a one-time net non-cash charge of $29.6 million.
Revenues increased 13.9% year over year to $6.57 billion, which was within management’s guided range of $6.3-$6.9 billion. However, the figure lagged the Zacks Consensus Estimate of $6.61 billion.
Electronics Manufacturing Services (EMS) revenues accounted for 63% of total revenues and increased 23% year over year to $4 billion, driven by strength in cloud, 5G/wireless, energy and automotive end markets.
Diversified Manufacturing Services (DMS) revenues accounted for 37% of total revenues and improved 2% year over year to $2.4 billion. The year-over-year growth was driven by robust performance in the healthcare business.
Gross margin, on a GAAP basis, contracted 10 basis points (bps) year over year to 7.5%.
Core EBITDA margin contracted 20 bps on a year-over-year basis to 6.6%.
Operating expenses on a GAAP basis contracted 30 bps on a year-over-year basis to 5.9%. While selling, general and administrative (SG&A) expenses shrank 30 bps to 4.2%, research & development (R&D) expenses as a percentage of revenues were flat at 0.2%.
Non-GAAP core operating margin expanded 10 bps on a year-over-year basis to 3.7%, which is within Jabil’s guided range of 3.4-4%.
EMS core margin was 4.3%, primarily due to the soft capital equipment space and costs associated with the ramping up of new business awards.
DMS core margin expanded 20 bps on a year-over-year basis to 2.9%, driven by improved business mix supported by Jabil’s diversification efforts.
Manufacturing Footprint Optimization Efforts
Jabil stated that overcapacity in the mobility business hurt DMS margins in fiscal 2019.
The company is taking steps to optimize its manufacturing footprint. It plans to reduce capacity that will help it efficiently utilize fixed assets and normalize the cost structure.
Moreover, for fiscal 2021, Jabil expects market share growth to boost unit volumes. The ongoing automation efforts and manufacturing process improvements will result in an optimized footprint.
Non-core expenses associated with Jabil’s optimization activities are estimated to be $85 million. The company’s optimization efforts will primarily be related to its manufacturing footprint in China.
Balance Sheet & Cash Flow
As of Aug 31, cash and cash equivalents were $1.16 billion compared with $694 million at the end of the previous quarter.
Core return on invested capital for was 21.3% in the reported quarter. The company exited the quarter with total debt to core EBITDA of approximately 1.5 times.
In the quarter, cash flow from operations was $1.1 billion.
In fiscal 2019, Jabil returned almost $400 million through buybacks and dividends. Moreover, its board of directors authorized a share repurchase program of up to $600 million as part of a two-year capital allocation framework.
For first-quarter fiscal 2020, Jabil expects total revenues between $6.65 billion and $7.35 billion.
DMS revenues are forecasted to be $3.1 billion, up roughly 3% year over year. EMS revenues are forecasted to be $3.9 billion, up nearly 11% year over year.
Core operating income is estimated to be $235-$285 million, with core operating margin of 3.4-4%. The company’s core earnings are expected between 82 cents and $1.04 per share on a non-GAAP basis.
For fiscal 2020, revenues are expected to be $26 billion. Moreover, revenues associated with the Johnson & Johnson Medical Devices Companies collaboration are still expected between $800 million and $1 billion.
Notably, the company is on track to complete the Wave 3 part of the transition by the end of this month.
Core operating income is expected to be $960 million, with core operating margin of 3.7%.
For DMS segment, revenues are expected to be $10 billion, up low-single digits. Jabil expects core operating margin to expand 10 bps primarily due to revenue mix shift from Mobility Edge Devices and Lifestyle to Healthcare & Packaging end markets.
Further, EMS segment revenues are expected to be $16 million, up 4%. Proliferation of autonomous driving & electric vehicles, roll out of 5G infrastructure and strong growth in cloud are expected to drive segment revenues.
Jabil expects 40 bps of core margin expansion in the EMS segment for fiscal 2020.
The company’s core earnings are expected to be $3.45 per share on a non-GAAP basis.
Adjusted free cash flow is expected to be more than $500 million.
For fiscal 2021, revenues are expected to be $27 billion. Core operating income is expected to be $1.08 billion, with core operating margin of 4%.
The company’s core earnings are expected to be $4 per share on a non-GAAP basis.
Further, adjusted free cash flow is expected to be more than $600 million.
How Have Estimates Been Moving Since Then?
Estimates review followed a flat path over the past two months. The consensus estimate has shifted -16.23% due to these changes.
At this time, Jabil has a great Growth Score of A, though it is lagging a lot 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 quintile 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.
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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