Some investors may not pay that much attention to market cap, but the market cap can tell us a lot about a stock. It refers to the financial worth of a company, as determined by multiplying the share price by the number of shares outstanding. Large-cap stocks are companies worth at least $10 billion, and they have some different characteristics as compared to small-cap stocks, including more stability and staying power.
Jabil Inc. (JBL, Financial), a manufacturing solutions provider, has recently seen its market cap rise to $10.33 billion, thanks mainly to rapid growth on the wings of the Covid-19 bull market. The price has risen to $77.48 per share as of the close of trading on Jan. 13, 2023. That’s a 408% increase in 34 months. Over roughly the same period, Jabil reduced its share count by an average of 4.1% per year. The combination of the price increases and the share reduction pushed the company into the large-cap club.
The question for investors now is, will it last? Can Jabil remain in the large-cap club, providing investors with more predictability?
About Jabil
Based in St. Petersburg, Florida, Jabil described itself as follows in its 10-K for fiscal 2022:
“We provide comprehensive electronics design, production and product management services to companies in various industries and end markets. Our services enable our customers to reduce manufacturing costs, improve supply-chain management, reduce inventory obsolescence, lower transportation costs and reduce product fulfillment time. Our manufacturing and supply chain management services and solutions include innovation, design, planning, fabrication and assembly, delivery and managing the flow of resources and products.”
At the end of its fiscal 2022, on Aug. 31, it had over 260,000 employees across 100 locations in 30 countries.
A look at financials
According to Jabil’s first quarter fiscal 2023 investor presentation, increasing earnings per share is a key objective:
The company has a significant amount of debt. Its interest coverage ratio is 8.2, which is adequate but not outstanding. That is reflected in the Altman Z-Score at 2.53, which is in the grey zone.
Still, it does make a positive return on its investments. The weighted average cost of capital (WACC) is 9.17%, while the return on invested capital (ROIC) is 15.34%.
The operating and net margins are about average for the hardware industry, at 4.25% and 2.83%. The company has been profitable for every year of the past 10.
Jabil receives a GuruFocus growth rank of 10 out of 10, which is based on its three- and five-year revenue and Ebitda growth and the predictability of its revenue growth:
Its revenue, Ebitda and earnings growth rates are all in the double digits. In addition, Ebitda is growing more quickly than revenue and earnings per share without non-recurring items is growing faster than Ebitda. Both of those metrics point to a company that is operating efficiently and effectively.
However, caution seems appropriate when considering the company’s free cash flow:
As this screenshot from the the fiscal first quarter of 2023 earnings release shows, this craziness is due to paying for new manufacturing capacity:
Since it pays a modest dividend of $0.08 per quarter or $0.32 per year, the cost is not significant ($48 million in fiscal 2022) in terms of total free cash flow.
Outlook and valuation
Looking ahead, Chairman and CEO Mark Mondello updated his fiscal 2023 outlook in the recent quarter, writing, “I remain confident in our plan moving forward, which is supported by both strong secular tailwinds and continued refinement of our more traditional businesses. As a result, we are raising our core EPS for the year to $8.40, a twenty-five cent increase from our outlook at the beginning of the fiscal year."
That’s in line with the Morningstar (MORN, Financial) analysts’ estimate of $8.38 in earnings per share. The analysts further forecast earnings per share of $9.14 in fiscal 2024 and $9.96 in fiscal 2025. These estimates work out to increases over fiscal 2022’s $6.90 per share. Earnings are expected to grow 21.4% for fiscal 2023, 32.46% for fiscal 2024 and 44.34% for fiscal 2025.
One of the near truisms of investing, and for good reason, is the idea that in the long run, share prices are driven mostly by earnings. That has been the case for Jabil over the past decade:
So, if the company can continue to grow its earnings, I think there’s every likelihood it will stay in the large cap club. If the share price grows at the same pace as earnings, it could rise by as much as 44% in the next 32 months.
Gurus
Ten of the investing gurus had positions in Jabil at the end of the third quarter, according to their 13Fs. The three largest stakes were those of:
- PRIMECAP Management (Trades, Portfolio) with 3,718,600 shares, representing 2.76% of Jabil’s shares outstanding and 0.21% of the fund’s 13F holdings.
- Steven Cohen (Trades, Portfolio) of Point72 Asset Management held 2,063,000 share.
- Ray Dalio (Trades, Portfolio)'s Bridgewater Associates owned 192,263 shares.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
Institutional investors owned 77.07% of the float, while insiders held 8.61%. Chairman and CEO Mark Mondello had the biggest stake among insiders, with 2,145,480 shares on Nov. 7, 2022.
Conclusion
Overall, I think it quite likely that Jabil will remain a member of the large-cap club, barring any market-wide retreat or economic disaster. It has a history of growing its earnings, and it has financial strength and a profitable business model to keep growing in the future.
We’ve seen that the share price tracks earnings fairly closely, and so we might expect the stock to deliver capital gains in coming years. Judging by the earnings estimates from Morningstar analysts, the future looks bright.
