Where is JBL’s value price right now?

After seeing some increasing choppiness in the market last week, the S&P 500 and the Dow pushed to a new set of highs at the beginning of the week. Not surprisingly, the Tech sector has been leading the market higher; as measured by the S&P 500 Technology Sector SPDR (XLK), the sector is up a little over 4% over the last week and 9% in the last month. It has also more than doubled in value from its March 2020, bear market low point. Most of the companies in this sector have followed that broader trend – especially stocks that specialize in the technologies that enable remote networking and cloud-based operations. If you follow the sector, or this particular trend, you are probably already familiar with some of the names in that segment, and that have been leading the sector’s surge throughout the year – but you may not be familiar with the companies that provide the services and solutions for those companies. The Semiconductor industry is a good example of an industry that supplies most of what makes just about every other kind of Tech solution possible; another is the Electronic Manufacturing Services industry.

Sub-industries can offer interesting opportunities to work with a fast-moving sector from a different angle than most can expect. Jabil Inc. (JBL) is an interesting example. This is a company that established itself by providing manufacturing services for a very narrow market segment – mobile phone manufacturers like Apple (AAPL), which continues to be their largest single customer. Over the last few years, however the company has worked to diversify its operations to reduce its reliance on that narrow segment and into cloud business as well as industrial and energy services. 

Like the broader sector, the stock has more than doubled in price since hitting a bear market low in March, but after flattening out near the top of its upward trend until the early part of March, the stock has broken out and started moving into a strong short-term upward trend. Does it also have the fundamental strength to keep rallying? Let’s dive in to the numbers to find out.

Fundamental and Value Profile

Jabil Inc., formerly Jabil Circuit, Inc., provides electronic manufacturing services and solutions throughout the world. The Company operates in two segments, which include Electronics Manufacturing Services (EMS) and Diversified Manufacturing Services (DMS). The Company’s EMS segment is focused on leveraging information technology (IT), supply chain design and engineering, technologies centered on core electronics, sharing of its large scale manufacturing infrastructure and the ability to serve a range of markets. Its DMS segment is focused on providing engineering solutions and a focus on material sciences and technologies. It provides electronic design, production and product management services to companies in the automotive, capital equipment, consumer lifestyles and wearable technologies, computing and storage, defense and aerospace, digital home, emerging growth, healthcare, industrial and energy, mobility, packaging, point of sale and printing industries. JBL’s current market cap is $7.9 billion.

Earnings and Sales Growth: Over the last twelve months, earnings increased 350%, while revenues increased about 11.5%. In the last quarter, earnings declined -24.4%, while sales were almost -13% higher. JBL operates with a very narrow, but improving margin profile; over the last twelve months, Net Income was 1.3% of Revenues, and strengthened in the last quarter to 2.22%.

Free Cash Flow: JBL’s free cash flow is healthy, at about $480.39 million, and translates to a Free Cash Flow Yield of 5.99%. It also marks an improvement from 362.73 million at the beginning of 2020.

Dividend Yield: JBL’s dividend is a modest $.32 per share, and translates to an annual yield of about 0.6% at the stock’s current price. The more interesting note is that the company pays a dividend, period, in an industry where most stocks do not. The size of the dividend is also not a reflection of pandemic-driven pressures, as JBL has historically maintained a very conservative dividend payout that has also been maintained at its current level for the past three years.

Debt to Equity: JBL has a debt/equity ratio of 1.27. This is a high number, and usually reflects a high degree of leverage. In JBL’s case, however their balance sheet shows healthy liquidity, with cash and liquid assets of nearly $1.1 billion in the last quarter versus $2.67 billion of long-term debt. It is also noteworthy that the company’s cash grew from around $697 million a year ago. Their healthy liquidity and Free Cash Flow, for now are effective counters to their narrow margin profile, and strongly suggest they should have no problem servicing their debt; however any kind of reversal of Net Income could create problems on that front.

Price/Book Ratio: there are a lot of ways to measure how much a stock should be worth; but I like to worth with a combination of Price/Book and Price/Cash Flow analysis. Together, these measurements provide a long-term target at about $29 per share. That suggests JBL is significantly overvalued by about -46% right now, with a useful discount price at around $23 per share. It is also worth noting that in the fourth quarter of 2020, this measurement yielded a fair value target at around $43 per share.

Technical Profile

Here’s a look at the stock’s latest technical chart.

Current Price Action/Trends and Pivots: This chart traces the stock’s movement over the last year. The red diagonal line marks the stock’s upward trend from its March 2020 low at around $17.50 to its peak last month at about $46; it also provides the baseline for the Fibonacci retracement lines on the right side of the chart. From December through the beginning of March, the stock hovered in a narrow range between support at $42 and resistance at $45 per share. It broke out of that range and has moved into a clear, new short-term upward trend from that point, with most recent resistance at around $54 and current support around $50. A drop below that point has downside to about $48, with additional support at $45 if bearish momentum increases. Given the current, $4 range between current support and resistance, a break above $54 should have upside to around $58 to next support.

Near-term Keys: If you’re looking for a short-term, bullish trade, a break above $54 could offer a useful signal to buy the stock or work with call options, with an eye on a quick exit target at around $58. A drop below support at $50, on the other hand, could offer a useful signal to consider shorting the stock or working with put options, with an eye on $48 as a quick bearish profit target, with additional room to $45 if bearish momentum picks up.  At its current price, however, there isn’t a value case to be made for JBL. Despite other fundamental strengths, I see the company’s narrow operating profile – which is also far more narrow than is typical for the industry – as a significant risk factor in its operations, which means that any misstep could be costly. I would prefer to see margins improving, with a useful value price for the stock at around $23 per share.