Shares of Jabil Inc. (NYSE:JBL) are down about 10% after reporting F3Q17 earnings, despite delivering results above expectations and initiating guidance for F18 earnings above Street and BAML's estimates. Bank of America Merrill Lynch reiterates its Buy rating on: strong upcoming quarters F4Q17 and F1Q18, DMS margins holding up well, with new program ramps on track and yields as planned, double digit y/y growth in packaging, Nypro and non-Apple Green Point revenues, longer-term opportunity in wearables, ability to gain share in future Apple products (non-iPhone), achievable, and beatable, F18 and F19 targets, focus on EMS 2.0 driving segment margins higher, strong cash flow and limited capex requirement, focus on shareholder returns, and valuation not expensive. The firm expects Jabil to grow its earnings at a 12% CAGR between F16 and F19, and its EPS at 18% CAGR. Shares currently trade at 10x, and the firm's PO is $34 on 12x C18E EPS of $2.75.
In BAML's opinion, Jabil is manufacturing components for all iPhone versions to be released in the fall. Some investor concern surrounds a possible delayed launch of the iPhone 8. In the firm's opinion, demand for iPhone 8 will outstrip supply, at least for a few quarters, given the OLED screen supply situation. F1Q is typically a strong quarter for Jabil; however, if some revenue shifts into F2Q then BAML could sees less seasonality vs. prior years. However, as long as demand for iPhone 8 remains strong (likely, given material change and strong iPhone upgrade cycle -see BAML's prior note on iPhone installed base and number of expected iPhone upgrades), Jabil would see the demand come in, albeit a little later, which will make F2Q a stronger quarter. The firm's F17 revenue/EPS move to $19bn/$2.11, from $18.8bn/$2.10. BAML's F18 revenue/EPS move to $19.6bn/$2.60 from $19.5bn/$2.54. The firm's PO moves to $34 (from $33) on 12x its C18E EPS of $2.75.