Jabil Inc JBL's operating margin and free cash flow trends are likely to inflect over the next 12 months, while increased diversity in the company’s businesses and improved profit streams should make returns increasingly stable, according to Raymond James.
The Analyst
Raymond James’ Adam Tindle upgraded Jabil from Market Perform to Strong Buy, while initiating a price target of $34.
The Thesis
Operating margin and free cash flow are key metrics for the IT supply chain coverage, as these figures highlight returns on capital, Tindle explained in the note.
The previous inflection in these matrices were witnessed in late 2014-2015, and during this period Jabil’s shares significantly outperformed the market and the peer group. Both these figures declined last quarter and shares have been underperforming.
Related Link: Jabil Faces A Tough Environment, But Is Focusing On The Right Metrics
Tindle mentioned these key matrices should begin improving steadily from the May quarter and continue through at least the next 12 months. The improvement is expected to be driven by new contractual wins.
“This should occur alongside a continued tailwind from 5G implementation over the next few years, and an eventual rebound in semicap equipment trends,” the analyst wrote in the note.
The shift in Jabil’s focus from a volatile mechanics business to Apple Inc. AAPL and beyond has resulted in a much more stable profit stream. The composition of the DMS segment should also improve significantly over the next few years, Tindle said.
Price Action
Jabil's stock jumped more than 5 percent to $28 per share Monday afternoon.
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