Shares of contract electronics manufacturer Jabil (JBL 4.36%) were clobbered following the release of the company's fiscal 2022 third-quarter earnings report on May 16. The stock fell 10% in a single session as investors were spooked about the possibility of a slowdown in the demand for its offerings.
Jabil reported healthy growth despite the supply chain issues plaguing the semiconductor industry. But management's comments on the latest earnings call regarding a potential weakness in demand due to economic slowdowns led investors to press the panic button. However, a closer look at Jabil's latest results and guidance indicates that investors may be overreacting.
NYSE: JBL
Key Data Points
Jabil crushed expectations and raised its guidance once again
Jabil delivered fiscal Q3 revenue of $8.3 billion, an increase of 15% over the prior-year period. Its adjusted earnings increased 32% year over year to $1.72 per share last quarter. Wall Street was looking for $1.62 per share in earnings on $8.22 billion in revenue from Jabil, but strong growth in the company's electronics manufacturing services (EMS) segment helped it crush expectations.
Jabil's EMS business produced 54% of its top line and posted 23% year-over-year growth, driven by fast-growing end markets such as industrial and semiconductor capital equipment, 5G wireless, cloud computing, digital printing, and retail. The diversified manufacturing services (DMS) segment registered a 7% year-over-year increase in revenue despite headwinds in certain areas. Jabil pointed out that the automotive, mobility, and healthcare packaging markets witnessed healthy demand.
More importantly, Jabil CFO Mike Dastoor said on the earnings call: "Across the majority of our end markets, demand has been extremely resilient and continues to outstrip supply across our business, particularly in end markets that continue to benefit from strong secular tailwinds, markets such as electric vehicles, personalized medicine and healthcare, clean and smart energy infrastructure, 5G infrastructure, cloud, and semi-cap."
Dastoor adds that these markets account for a large chunk of Jabil's portfolio, and "sustained growth in these markets will continue, even if overall global economic growth slows from the solid levels over the last few years."
Jabil management's confidence in healthy end-market demand reflects in the company's guidance, which was upgraded once again. The company now expects $32.8 billion in revenue this year along with adjusted earnings of $7.45 per share. For comparison, Jabil had guided for $6.35 per share in earnings on $31.5 billion in revenue at the beginning of the fiscal year. The improved guidance isn't surprising as Jabil headed into its quarterly report with multiple growth drivers, including the sunny prospects of its largest customer Apple (NASDAQ: AAPL).
Jabil's current annual guidance points toward a 12% year-over-year increase in revenue, while fiscal 2022 earnings are on track to increase 33% over the prior-year period. However, it won't be surprising to see Jabil raise its guidance further thanks to a bunch of key growth hotspots, which should also ensure multi-year growth for the company.
Investors shouldn't miss the bigger picture
We have already seen that Jabil management is confident of sustaining its growth thanks to the markets that it is serving. A closer look indicates that there is a huge opportunity available for the company to tap and ensure consistent long-term growth. For instance, the healthcare contract manufacturing market that was worth an estimated $212 billion in 2021 is expected to clock annual growth of 9.6% through the end of the decade, which means that it could be worth $483 billion by 2030.
Similarly, Jabil's supplier relationship with Apple should present another secular growth opportunity for the company. Apple was Jabil's largest customer last year, accounting for 22% of its top line. The tech giant uses Jabil's casings in its iPhones and iPads. Given that Apple is dominating the 5G smartphone market with its iPhones and is taking steps to diversify its presence into more markets such as self-driving cars and mixed reality headsets.
As a result, Jabil's reliance on Apple for a substantial chunk of its revenue could turn out to be a catalyst in the long run as its largest customer branches out into fast-growing niches and expands its product portfolio. All of this indicates that it won't be surprising to see Jabil sustain its healthy bottom-line growth in the long run, which is why investors may want to buy the stock hand over fist right now given its dirt-cheap valuation.
Jabil is trading at just 9.8 times trailing earnings, which is a huge discount over the Nasdaq-100's multiple of 26. The company's impressive growth indicates that it is significantly undervalued right now, so investors have an opportunity to buy this potential growth stock on the cheap before it takes off.
