Jabil 1Q Beats, Guides Up - Analyst Blog

Shares of electronic parts manufacturer Jabil Circuit Inc. (JBL) rose 98 cents or 5.6% on Monday trading at $18.45 as first quarter fiscal 2011 results beat the Zacks Consensus expectation.

Earnings

Jabil's reported earnings (including stock-based compensation expense and one-time expenses) increased significantly in the quarter to 52 cents per share, beating the Zacks Consensus Estimate of 47 cents. Earnings per share (EPS) increased 108.0% from 25 cents in the year-ago quarter.

Earnings (excluding stock-based compensation but including one-time charges) leapt 90.6% year over year to 61 cents per share from 32 cents per share in the prior-year quarter. The quarter's EPS was above management's guidance range of 53 cents to 57 cents.

This strong growth was driven by better-than-expected top-line growth and a stronger operating margin in the quarter. Results were boosted by a strong growth across all its segments.

Revenue

Jabil posted revenue of $4.08 billion in the first quarter, up 32.2% from $3.09 billion in the year-ago quarter and above management's guidance of $3.9 billion to $4.0 billion. Revenues surpassed the Zacks Consensus Estimate of $3.96 billion. The year-over-year increase was driven by a surge in demand.

Margin

Gross profit in the quarter was $310.6 million, up 34.0% year over year. Gross margin increased 10 basis points to 7.6%. The strong growth was primarily driven by higher revenue and better cost absorption.

Operating profit (including stock-based compensation but excluding one-time charges) was $162.4 million, up 75.6% from $92.5 million in the year-earlier quarter. Operating margin increased 100 basis points to 4.0%.

Balance Sheet & Cash Flow

Exiting the first quarter, cash and cash equivalents were $630.2 million, down from $744.3 million in the prior quarter.

We believe Jabil's fairly high level of debt may limit financial flexibility going forward. Long-term debt (including current portion) as of November 30, 2010, was $1.30 billion, compared with $1.19 billion as of August 31, 2010.

The company's net cash balance (cash less debt including current portion) was a deficit of $668.2 million or $3.07 per share in the first quarter of 2011 versus $442.2 million or $2.05 per share in the fourth quarter of 2010.

The company used $82.7 million in cash from operations. Sales cycle was 16 days while annualized inventory turns were seven in the quarter. Capital expenditures were $101.3 million while depreciation was $69.0 million. Core return on invested capital was 28.1% for the first quarter. The company also paid 7 cents in dividend on December 1, 2010.

Guidance

Management pointed out that continued focus on diversification and a differentiated business model will help the company grow throughout fiscal 2011.

Jabil expects second quarter 2011 revenue between $3.85 billion and $3.95 billion, above Zacks Consensus Estimate of $3.69 billion.

The company forecasts second quarter 2011 earnings on a GAAP basis in the range of 37 cents to 41 cents per share.  Core EPS (non GAAP) is expected to range between 49 cents and 53 cents. This excludes 3 cents in amortization expenses and 9 cents in stock-based compensation expenses.

Jabil's EPS guidance is above the current Zacks Consensus Estimate of 37 cents.

Recommendation

Jabil is expected to achieve strong top-line growth over the long term, riding on new business wins. The company's top customers include Research in Motion (RIMM) and Apple Inc. (AAPL).  Strong growth in the Mobility, Aerospace and defense, Health Care, Instrumentation and Industrial, Networking and Storage segments are expected to drive the company's growth.

Though key end markets remain strong, sluggish IT enterprise spending, intense competition and a slowdown at Jabil's customer – Cisco Systems (CSCO) – with 15% revenue share in 2010 could limit growth.

We reiterate our long-term (6–12 month) Neutral rating; although near-term uncertainties in demand have prompted a short-term Sell rating, represented by the Zacks #4 Rank.

 
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