Description

We are long Jabil Inc. (JBL) a high quality EMS company with a 10%+ forward FCF yield, low leverage and a massive share buyback program.  Largest customers are Apple, Cisco, Go Pro, HP, Ingenico, Ericsson, NetApp, Nokia, Valeo and Zebra Technologies.  We believe that Jabil is an obvious activist candidate.

The big negative is that Apple makes up 25% of revenue and likely 1/3^rd of EBITDA.  Everything else is quite positive.

• On a market cap and EV of $4.5B and $6.5B (including $600m securitization)
• 8/31/18e revenue / EBITDA / FCF will be $20.2B / $1.45B / $400m
• 8/31/19e revenue / EBITDA / FCF will be $20.8B / $1.53B / $550
  
• Valuation on 8/18e is 4.5x EBITDA, 11.0x FCF with debt/EBITDA at 1.3x
  • 8/31/19e on minimal EBITDA growth with cap-ex going down by $100m - FCF multiple is 8.2x
  • If Apple business were to go to zero (hard to imagine) – on 8/31/19e EV/EBITDA is 6.5x and FCF multiple is 13x
     
• The non-Apple businesses are excellent.  Jabil has two segments:
  • EMS (traditional electronic manufacturing services) – 4% EBIT margins are quite good for an EMS
  • DMS (diversified manufacturing services).  Greenpoint (Apple), healthcare (Nypro) and packaging….
  • …healthcare and packaging part of DMS growing revenue HSD and EBIT at a 20%-25% CAGR
  • Healthcare/Packaging EBITDA margins near 10% w/ teens growth rate far better than normal EMS   

• Guidance. On its 12/14/17 Q1 call, Jabil guided to $2.60 EPS for 8/31/18 year.  They also reiterated targets below
• At its Sep 27, 2016 investor day, Jabil laid out the following three year targets (8/31/17 – 8/31/19): 
  • EMS annual revenue growth > 3%.  EBIT margin range of 2% - 4%.
  • DMS annual revenue growth > 5%.  LT EBIT margin range 5% - 7% (we think 5% by 2020/21).
  • Total company annual revenue growth 4% - 5%.  EBIT margin of 4%
  • EBIT growing by 8% - 10% annually.  EPS growing from $1.86 in FY 2016 to $3.00 in FY 2019
  • $3.5B cash from operations w/ 40% being returned to shareholders - $1.4B ~ $8 per share
     
• Activist Opportunity. 
  • Break up EMS and DMS into two separate public companies
  • Within DMS sell/spin/highlight the value of the healthcare and packaging businesses
  • Radically improve segment disclosures – lack of D&A and cap-ex by segment is ridiculous
  • Cap-ex at 3% of 8/31/19e revenue is too high, comps are less than 2% (Flex 1.8% - Sanmina 1.6%)
  • Cap-ex at 2% of revenue would mean FCF improves $200m, a massive number on $4.5B market cap  

 Electronic Manufacturing Services (EMS).  This segment is a traditional EMS business comparable to FLEX

From the 10K……“Our EMS segment is focused around leveraging IT, supply chain design and engineering, technologies largely centered on core electronics, utilizing our large scale manufacturing infrastructure and our ability to serve a broad range of end markets. Our EMS segment is typically a lower-margin but high volume business that produces product at a quicker rate (i.e. cycle time) and in larger quantities and includes customers primarily in the automotive and transportation, capital equipment, computing and storage, digital home, industrial and energy, networking and telecommunications, point of sale and printing industries.”

On 8/31/18e – revenue, EBIT and EBITDA of $11.5B, $450m and $665m.  A 3.9% EBIT margin for an EMS company is excellent.  The closest comp to this segment is FLEX, which is expected to do a 3.7% EBIT margin in the 3/31/19 year (assuming Nike kicks in) and trades at an EV/EBITDA of close to 8x.  FLEX’s valuation benefits from its widely publicized relationship with Nike for whom it now manufactures sneakers.  The market views Nike as a significant potential contributor to future revenue/earnings growth and likes the fact that FLEX has expanded outside of electronics.  We can’t think of a reason why Jabil at its size and scale couldn’t do the same thing as FLEX.

EMS companies industrywide are benefiting from the “electronification” of the world, increasing mix of new age tech products like Go-Pro/Fitbit, rapid growth of electronics in cars, greater involvement in the design aspects of their customers products etc - all of which is driving EBIT margin improvement.  We see no reason why Jabil’s EMS EBIT margin doesn’t reach the 4% - 5% range over time.

Diversified Manufacturing Services (DMS).  There are multiple businesses within DMS – the disclosures are awful.

From the 10-K:  Our DMS segment is focused on providing engineering solutions, with an emphasis on material sciences and technologies. Our DMS segment is typically a higher-margin business and includes customers primarily in the consumer lifestyles and wearable technologies, defense and aerospace, healthcare, mobility and packaging industries.

For the 8/31/18 year, we expect revenue, EBIT and EBITDA of $9B, $312m and $800m.  The 3.5% EBIT margin is heavily burdened by depreciation related to significant cap-ex spend for Apple over the last few years.  Target EBIT is 5%-7%.  Importantly, EBITDA margin is over 9%.

Within DMS there is Greenpoint (includes Apple business), Nypro (healthcare), Jabil Packaging (consumer/industrial packaging) and other (GoPro, Aersospace & Defense)

Greenpoint (www.jabil.com/solutions/by-brand/green-point.html).  We estimate $6B in revenue which includes $5B in Apple revenue.  From the website “Greenpoint is a market leader in designing and manufacturing plastic and metal parts for consumer and mobile product markets. In addition to strengths in advanced decoration and coating technologies, Green Point has extensive expertise in processes that optimize production for the world’s most well-known mobile brands.” 

Greenpoint manufactures casings and other components for iPhones and other Apple products.  Hon Hai (2317-TW) and Catcher Technology in Taiwan (2474-TW) are the other Apple casings suppliers.  Catcher talks about rapid expected growth in its Apple business while Jabil talks about flattish revenue from Apple going forward as Jabil works to diversify its Greenpoint revenues with other smart phone manufacturers.  It’s hard to know where Apple plans on sending its business, but we do know that (1) Jabil spent heavily on cap-ex for Apple and while there are no guarantees Jabil is comfortable that Apple remains an important customer (2) Apple likely wants multiple suppliers for its highly complicated casings needs - Hon Hai gets most of the business, Catcher and Jabil have the rest.  Interestingly, Catcher reports 50% EBITDA margins while Jabil’s are less than 10%.

Nypro (www.jabil.com/solutions/by-brand/nypro.html).  We estimate $2B in revenues.  From the website… “Our highly-specialized teams meet the complex demands of the diagnostic, medical device, pharmaceutical and consumer health markets…..Nypro’s customer-focused services range from ideation to device development support, engineering, supply chain optimization, and device assembly operations, all at our purpose-built facilities…..Nypro has partnered in the launch of many of the world's leading diagnostic, drug delivery, medical device, and consumer health products”.   Among other things, Nypro manufactures diagnostic equipment and specialized pharmaceutical delivery devices (i.e. EpiPen).

Jabil Packaging (www.jabil.com/solutions/by-industry/consumer/packaging-solutions.html) We estimate $500m in revenues offering packaging solutions for CPG companies, industrial, food & beverage and consumer health products.  This business is growing rapidly off a small base.  The rest of DMS includes aerospace and defense and wearable technologies like GoPro.

Jabil talks about new technologies and digital innovation that it is applying to both healthcare and packaging. Management is has been delivering and continues to target 20% to 25% annual EBIT growth in these businesses.    

Valuation.  Jabil is essentially returning all FCF to shareholders via dividends/buybacks.  Today’s share count of 178m is down from 211m in 2012.  Management is guiding cap-ex down by $100m next year as the company comes off several years of heavy growth mostly within DMS/Apple segment but at 3% of revenue the number is still too high.  A one percentage point reduction in cap-ex to 2% of revenue (still higher than Flex & Sanmina) adds $200m to FCF -  8/31/19 FCF goes from $550m ($3.10 per share) to $750m ($4.20 per share).

On fiscal 2019 numbers – a multiple of 6.0x on EMS EBITDA of $675m, 7.5x on healthcare/packaging/other EBITDA of $335m and 2.5x on Apple EBITDA of $500m along with ongoing share buybacks would bring a $38.50 share price. 

Jabil’s Apple revenues will certainly be choppy – modeling Apple product volumes and Jabil content per Apple product is virtually impossible.  The company’s own guidance calls for overall company growth in fiscal 2018 and 2019.  As noted above, if Apple disappeared completely the stock is still reasonably priced.  Even if Apple declines somewhat going forward there is still growth in every other part of the business to offset the weakness – a flat EBITDA with lower cap-ex and fewer shares o/s would still drive increasing FCF per share.  In this scenario, the urgency to highlight the value of healthcare/packaging and bring down cap-ex probably grows. 

It’s a no-brainer for an activist at the very least to force proper segment disclosures as well as revenue lines within the EMS segment.  Some combination of a sale/spin almost certainly makes sense here as well, we question whether the packaging/healthcare businesses even belongs within an EMS. 

Catalyst

Rising FCF. Continued buybacks. Pressure to improve disclosures. Potential activist situation.