It has become pretty normal over the last several years to see the Technology sector leading the market – after all, Technology is increasingly at the center of just about every part of our daily lives in one sense or another. During the pandemic, Technology has been both catalyst and a hindrance to overall economic health and growth. That sounds strange; but since the sector is made up of various interrelated, but still distinct industries, it is possible for one industry to facilitate growth while another struggles.
In the early stages of the pandemic, much of corporate America shifted to remote work models to keep business running; that put a big emphasis not only on e-commerce but also on services and solutions that enabled remote, cloud-based collaboration, communication, and productivity. That is why a lot of the darlings of the past year and a half have been stocks that focus on providing web-based meetings and cloud-based services that enable remote work.
While that industry in the Tech sector kept much of corporate America running and functioning, at the same time chip shortages that began to be seen even before the onset of the global health crisis in the Semiconductor industry not only presented challenges to its immediate customers; the longer those conditions persisted, the more their effect has rippled out into other sectors of the market to add to supply chain problems that are now increasing consumer prices. Even so, as measured by the S&P 500 Technology Sector SPDR (XLK), the sector is up nearly 33% over the past year and 22% year to date. The challenges I just mentioned gave the market a reason to push a lot of related Tech stocks lower, pushing the XLK off of a 52-week high, about 7.5% lower at the beginning of October before it was able to start rallying higher again in the last week. If you follow the sector, 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. Despite many of its current challenges, 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 – largely mobile phone manufacturers like Apple (AAPL), which continues to be their largest single customer. Over the last few years, however the company has worked hard to diversify its operations to reduce its reliance on that narrow segment and into cloud business as well as industrial and energy services.
Like many of the stocks in the broader sector, the stock has more than doubled in price in just the last year, but since the beginning of October it has dropped off of its own 52-week high, and could be nearing a useful support level for a classic, technical pullback that market technicians like to call “buying the dip.” 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 $8.9 billion.
Earnings and Sales Growth: Over the last twelve months, earnings increased 163.64%, while revenues increased about 11.51.5%. In the last quarter, earnings were about 3.6% higher, while sales were 2.7% higher. JBL operates with a very narrow; over the last twelve months, Net Income was 2.38% of Revenues, and 2.36% in the last quarter.
Free Cash Flow: JBL’s free cash flow is healthy, at about $640 million, and translates to a Free Cash Flow Yield of 7.1%. It also marks an improvement from $362.73 million at the beginning of 2020 and $525 million in the quarter prior.
Dividend Yield: JBL’s dividend is a modest $.32 per share, and translates to an annual yield of about 0.53% 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 not changed from its current level for the past three years.
Debt to Equity: JBL has a debt/equity ratio of 1.35. 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 $1.24 billion in the last quarter versus $2.9 billion of long-term debt. It is also noteworthy that the company’s cash grew from around $838 million in the previous quarter. 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 $49 per share. That suggests JBL is overvalued by about -19% right now, with a useful discount price at around $39.50 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 November 2020 low at around $31.50 to its peak earlier this month at about $64.50; it also provides the baseline for the Fibonacci retracement lines on the right side of the chart. The stock has dropped off of that peak in the last few days, marking immediate resistance at $64.50, and appears to be approaching support at around $61. The $3.50 distance between current support and immediate resistance provides a generalized reference for the stock’s potential upside above its last peak and suggests that a push above $64.50 could find next resistance at around $68. A drop below $61, on the other hand should find next support at around $59, based on pivot activity in that range in August and September, with $57 possible if bearish momentum picks up.
Near-term Keys: If you’re looking for a short-term, bullish trade, a bounce off of support at $61 could offer a useful signal to buy the stock or work with call options, with an eye on a quick exit target at the stock’s 52-week high around $64.50. A drop below $61, on the other hand, could offer a useful signal to consider shorting the stock or working with put options, with an eye on $59 as a quick bearish profit target, with additional room to $57 if bearish momentum accelerates. At its current price, however, there isn’t a value-based case to be made for JBL. Despite other fundamental strengths, I see the company’s narrow operating profile – which is also far more marginal than is typical for the industry – as a significant risk factor in its operations, since that any operational misstep could be costly. I would prefer to see margins improving, with a useful value price for the stock at around $39.50 per share.