The stock market's forgettable performance in 2022, caused by surging inflation and the Federal Reserve raising interest rates in a bid to control it, did have at least one positive effect. It created a situation where investors can now buy stock in some great companies at attractive valuations.
Contract electronics manufacturer Jabil (JBL -8.37%) and optical networking components provider Ciena (CIEN -0.48%) are two such stocks that look like attractive bets following significant price declines so far this year. Jabil, which is known to manufacture casings for Apple's smartphones and tablets, is trading down 20% in 2022. Ciena stock has witnessed a sharper drop of 47% so far.
The drop in the share prices of these companies gives savvy investors an opportunity to buy them at attractive valuations, which they may not want to miss. Let's take a closer look at these two beaten-down stocks that have potentially crush the market.
1. Jabil's dirt cheap valuation and resilient growth make it an attractive bet
Jabil stock is trading at just 9.6 times trailing earnings, while its forward price-to-earnings (P/E) ratio of 6.9 points to an improvement in its bottom line. What's more, the company sports a price-to-sales (P/S) ratio of just 0.26. These multiples indicate that Jabil stock is a great value right now. The S&P 500, for instance, has a sales multiple of 2.4, and the index's P/E ratio stands at 21.
Buying Jabil stock at its current valuation looks like the right thing to do if you consider the robust growth it is clocking in difficult times. In the third quarter of fiscal 2022 (for the three months ending on May 31), Jabil's revenue increased an impressive 15% year over year. Jabil's adjusted earnings were up 32% year over year to $1.72 per share.
The company's impressive results were driven by healthy demand from different segments such as automotive, healthcare, 5G wireless communications, and mobility, among others. Jabil also enjoyed a stronger margin profile during the quarter, and it is on course to close the fiscal year with solid double-digit revenue and earnings growth.
Analysts are also positive about Jabil's future, forecasting 13.5% annual earnings growth for the next five years. It won't be surprising to see Jabil hit Wall Street's expectations -- or even exceed them -- thanks to secular growth opportunities and its relationship with Apple, which has been a key customer over the years.
Apple produced 22% of Jabil's top line in fiscal 2021. The warm reception that the iPhone 14 models received indicates the tech giant could continue to move the needle in a big way for the contract electronics manufacturer. Apple is reportedly boosting the production of its Pro models to meet the healthy demand that those devices are witnessing, according to noted analyst Ming-Chi Kuo.
It is worth noting that Apple reportedly placed orders to make 90 million iPhone 14 units in 2022, but then increased that number to 95 million in anticipation of solid demand. The latest supply chain inputs from Kuo indicate Apple may well have to further increase output. Such a move could result in more orders for Jabil and help the company close the year on a high given that Apple had produced an estimated 80 million iPhone 13 units in 2021.
Investors should also note that the global contract electronics market in which Jabil operates is expected to exceed $1 trillion in revenue by 2030 as compared to this year's estimate of $515 billion. In all, Jabil has a lot going for it that could send the stock soaring in the long run, and that's why investors looking for a value play right now may want to take a closer look at this company.
2. Ciena could step on the gas thanks to a healthy order book
Ciena's steep stock price decline this year isn't surprising as a shortage of parts has hit the company's ability to fulfill orders for networking components. This was evident from Ciena's fiscal 2022 third-quarter results for the three months ending on July 30.
The company posted $868 million in revenue and $0.33 per share in adjusted earnings during the quarter. Its top line was down 12% year over year while the bottom line fell 64% year over year thanks to a 10.6 percentage point decline in the operating margin over the prior-year period.
Ciena CEO Gary Smith pointed out on the earnings conference call that the company has "been challenged by the unpredictable performance of specific vendors and their associated component traits." Substantial delays in component deliveries and the inability of Ciena's suppliers to meet the required demand have hampered its ability to grow sales. Additionally, Ciena's gross margin is being put under pressure by higher component costs.
Ciena's challenges are here to stay in the near term as its revenue forecast of $840 million for the current quarter sits well short of the $1.07 billion consensus estimate. The bigger picture, however, appears to be bright.
Ciena management points out that the company is sitting on an order backlog worth $4.4 billion. That's nearly 19% higher than the company's trailing-12-month revenue of $3.7 billion. The company's strong backlog also reflects the healthy growth in its order book. Ciena has witnessed 60% order growth in the past four quarters compared to the prior-year period. In fiscal Q3 as well, Ciena received 30% more orders compared to its revenue.
So, Ciena's growth should pick up the pace as the company starts working through its backlog and the supply constraints ease. Analysts believe the turnaround could arrive in fiscal 2023, estimating a 17% increase in the company's revenue and an 86% spike in its earnings. That won't be surprising given the impressive backlog Ciena is sitting on.
Investors looking for a turnaround play may want to accumulate Ciena stock, which is trading at 1.7 times sales and 14 times forward earnings. It may not be available at such attractive multiples once its top and bottom lines start accelerating.
