Inflation And Geopolitical Risks Threaten Earnings Despite AI And Cloud Growth

Key Takeaways

• Weakness in renewable energy and EV markets may hinder Regulated Industries revenue growth, while relocation costs pressure net margins.
  
• Inflation, interest expenses, and geopolitical risks could challenge earnings, despite AI and cloud services offering potential revenue growth.
  
• Strong demand in AI and cloud drives revenue, while strategic investments and global expansion enhance growth potential and stability across diverse sectors.

Catalysts

Provides manufacturing services and solutions worldwide.

• Continued weakness in renewable energy and EV markets may negatively impact future revenue growth in the Regulated Industries segment.
  
• Increased costs from relocating manufacturing programs may pressure net margins despite anticipated long-term benefits of greater U.S. production capabilities.
  
• Inflationary pressures and higher interest expenses could challenge earnings, despite ongoing efforts in cost optimization and free cash flow generation.
  
• The potential impact of geopolitical risks, such as changing tariff implications, could lead to increased operational costs and affect net margins.
  
• While expecting revenue growth from AI and cloud services, the implementation and scaling of newly acquired capabilities could pressure earnings in the short term if not managed efficiently.

Jabil Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Jabil's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 4.7% today to 2.3% in 3 years time.
• Analysts expect earnings to reach $682.9 million (and earnings per share of $8.42) by about December 2027, down from $1.3 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.8x on those 2027 earnings, up from 12.9x today. This future PE is lower than the current PE for the US Electronic industry at 25.8x.
• Analysts expect the number of shares outstanding to decline by 10.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.53%, as per the Simply Wall St company report.

Jabil Future Earnings Per Share Growth

Risks

• The Intelligent Infrastructure segment at Jabil is seeing strong demand in AI-related cloud, data center infrastructure, and capital equipment markets, driving revenue and margin growth, suggesting positive future earnings in these areas.
  
• Jabil's strategic investments in liquid cooling solutions and capabilities for thermal management open opportunities in data center ecosystems and electric vehicles, potentially enhancing revenue and margins over time.
  
• The company's ability to quickly rebound from severe weather disruptions and maintain operational stability highlights its resilience, positively impacting ongoing revenue generation and operational margins.
  
• Jabil's significant free cash flow generation and share buyback plans underscore financial stability and shareholder value returns, influencing overall earnings positively.
  
• The successful expansion of global manufacturing sites, including in Croatia, for healthcare and automotive sectors and the strategic repositioning of programs to the U.S. due to customer preferences may reduce geopolitical risks and support diversified revenue growth and margin stability.

Valuation

• The analysts have a consensus price target of $161.25 for Jabil based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $179.0, and the most bearish reporting a price target of just $144.03.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $29.8 billion, earnings will come to $682.9 million, and it would be trading on a PE ratio of 23.8x, assuming you use a discount rate of 7.5%.
• Given the current share price of $147.77, the analyst's price target of $161.25 is 8.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.