Investors surprisingly pressed the sell button last week following the release of Jabil's (JBL -0.18%) second-quarter fiscal 2023 earnings report (for the three months ended Feb. 28), even though the contract electronics manufacturer's numbers were better than what Wall Street forecast.
Jabil's stock price dropped, as investors were probably expecting a bigger beat from a company that counts Apple (AAPL -0.35%) as its biggest customer. They may also have expected it to raise its full-year guidance, as it did last time. However, a closer look at Jabil's performance, outlook, and valuation indicates that investors may have overreacted to the company's latest report.
The good part is that savvy investors now have an opportunity to capitalize on Jabil's drop and buy the stock on the cheap. Let's see why this is an opportunity they may not want to miss out on.
Jabil's solid growth looks here to stay
Shares of Jabil have jumped 23% in 2023, and that's not surprising given the solid growth the company has delivered of late. Its fiscal second-quarter revenue increased 8% over the prior year to $8.1 billion, while the non-GAAP (adjusted) operating margin was up 20 basis points to 4.8%.
The increase in Jabil's revenue and the improvement in its margin led to a 12% year-over-year increase in the company's adjusted earnings to $1.88 per share. Analysts would have settled for adjusted earnings of $1.85 per share on revenue of $8.09 billion. The strength in Jabil's automotive, industrial, and healthcare businesses allowed it to deliver better-than-expected numbers and helped offset the weakness in the connected devices and mobility end markets.
Additionally, the company maintained its full-year revenue outlook of $34.5 billion and adjusted earnings of $8.40 per share. The bottom-line forecast points toward a nice jump from fiscal 2022, when Jabil delivered $7.65 per share in earnings. More importantly, Jabil expects to sustain impressive earnings growth in the future as well.
JBL EPS Estimates for Current Fiscal Year data by YCharts
Jabil's bright outlook can be attributed to the secular growth opportunity in the contract manufacturing services space. Grand View Research estimates that the electronic contract manufacturing market alone could clock almost 10% annual growth through the end of the decade, driven by the growing adoption of contract manufacturing in multiple verticals such as automotive, data centers, healthcare, smart homes, and others.
The research firm estimates that the global electronic contract manufacturing market generated $515 billion in revenue in 2022, and the estimated growth rate suggests that it could be worth just over $1 trillion by the end of the decade. So Jabil is scratching the surface of a huge end-market opportunity, and the good part is that it is capitalizing on the growth hotspots within this space already.
For instance, management projects the company's automotive revenue will increase 42% this year to $4.4 billion. Jabil anticipates solid growth in this segment in the future thanks to the growing adoption of electric vehicles (EVs). That's not surprising, as EV manufacturers have been partnering with contract electronic manufacturers to scale up their operations.
At the same time, the rumored launch of new products from Apple could be another tailwind for Jabil. The contract electronics manufacturer got 19% of its revenue from Apple in fiscal 2022. Supply chain gossip indicates that Apple could soon launch an augmented reality (AR) headset and is aiming to sell a million units of the device in the first year.
The Grand View Research report says the market for AR headsets is expected to clock an annual growth rate of almost 74% through 2025. Apple could become a key player in this market, and that would bode well for Jabil, as it manufactures aluminum encasements for the iPhone and the iPad. Jabil's contract manufacturing relationship with Apple could give the former a nice boost in 2023 and beyond with the addition of a potential new product.
The valuation is quite attractive
Jabil stock is trading at just 12 times trailing earnings even after rising impressively in 2023 so far. What's more, the forward earnings multiple of 9.9 points toward bottom-line gains. Also, the price-to-sales ratio of just 0.32 further indicates that Jabil stock is dirt cheap right now. These multiples are well below the S&P 500's sales multiple of 2.3 and the price-to-earnings ratio of 18.
Analysts expect Jabil to clock 11% annual earnings growth over the next five years. The prospects of the market in which the company operates indicate that it could very well deliver double-digit earnings growth in the long run. Investors looking to buy a value stock should take a closer look at Jabil since it could deliver healthy gains in the future.
