Citi Turns Bullish On Jabil, Says Customer Risk Concentration 'Played Out'

The bearish case for electronic and optical manufacturing solutions company Jabil Inc JBL can no longer be justified, as a notable headwind has "played out," according to Citi.

The Analyst

Jim Suva upgraded Jabil from Sell to Buy with a price target lifted from $27 to $36. Suva also included Jabil's stock in the research firm's "U.S. Focus List."

The Thesis

Bears typically argue that the case against owning the stock is rooted in customer concentration, as Apple Inc. AAPL accounts for around 28% of all sales, Suva said in a Wednesday upgrade note. (See his track record here.) 

Apple is now showing momentum in its wearable business, which is a larger business for Jabil compared to iPhone casings, the analyst said. 

The company's customer concentration risk eased a bit after Jabil inked a new relationship with Johnson & Johnson JNJ for its medical devices business, he said. 

When the relationship is fully ramped, Johnson & Johnson will likely account for 5% of Jabil's sales and 8% of total EBIT, Suva said. 

Jabil will host a virtual investor day in late September that could prove to be a catalyst for the stock, as management is expected to guide to the following, the analyst said:

• Sales of $27 billion versus consensus estimate of $26.4 billion.
• EPS of "at least" $3.40 versus consensuses at $3.37.
• A new stock buyback program worth $350 million, or 8% of the total market cap.

Meanwhile, Jabil's stock is trading at around nine times next 12 months EPS, which represents a discount to the five-year average of 10 times, he said.

The discount may not be warranted given potential lifts from Apple and Johnson & Johnson and expectations for Jabil to post double-digit EPS growth over the coming two years, according to Citi. 

Price Action

Jabil shares were up 7.83% at $28.23 at the close Thursday. 

Related Links:

Raymond James Upgrades Jabil On Legal Combo Of Tactical Metric Inflection, Structural Improvements

Benzinga's Top Upgrades, Downgrades For August 29, 2019

Photo courtesy of Apple.