Jabil Misses 1Q Estimates

Jabil Circuit Inc. (JBL - Analyst Report) reported first quarter 2012 earnings of 56 cents per share, missing the Zacks Consensus Estimate by 2 cents. Jabil also missed the Zacks Consensus revenue Estimate of $4.41 billion.

Earnings per share (EPS) increased 7.7% year over year from 52 cents (including stock-based compensation but excluding amortization). The strong results were primarily driven by solid top-line growth and operating margin expansion in the quarter.

Revenue

Revenue increased 6.0% year over year to $4.33 billion in the first quarter of 2012 and was in line with the low end of management’s guided range of $4.3 billion to $4.5 billion. However, reported revenue failed to achieve the forecasted growth rate of 8.0%. Higher quarterly revenues were attributable to market share gains, new customer wins and strong growth from the emerging markets.

Diversified manufacturing segment revenue (42.0% of the total revenue) increased 30.0% year over year to $1.8 billion. Enterprise and Infrastructure segment revenue (28.0% of the total revenue) was up 4.0% year over year to $1.2 billion. However, High velocity segment (30.0% of the total revenue) decreased 14.0% year over year to $1.3 billion.

Operating Performance

Gross profit was $329.2 million, up 9.5% year over year while gross margin increased 30 basis points year over year to 7.9%. This was primarily driven by the favorable product mix.

Operating income (including stock-based compensation) escalated 8.3% year over year to $176.0 million in the reported quarter. Operating margin was 4.1% compared with 4.0% in the year-earlier quarter. Segment wise, Diversified manufacturing operating margin was 6.8% in the quarter. Core operating margin for the Enterprise and Infrastructure segment was 2.0%. High velocity posted an operating margin of 3.8% in the quarter.

The strong upside in operating margin was primarily attributable to lower-than-expected increase in both selling, general and administrative (SG&A) expense and research and development (R&D) expense in the quarter. SG&A expense increased 10.8% year over year to $157.8 million, while R&D climbed 9.2% year over year to $6.3 million in the quarter.

Net income increased 4.3% year over year to $118.0 million. Net margin, however, remained flat year over year.

Balance Sheet & Cash Flow

Exiting the first quarter of 2012, cash and cash equivalents were $861.9 million, down from $888.6 million in the prior quarter. Jabil’s debt level remained flat sequentially in the first quarter. Total debt, as of November 30, 2011, was $1.19 billion.

The company’s net cash balance (cash less debt including the current portion) was a deficit of $334.4 million or $1.59 per share in the first quarter of 2012 compared with $298.1 million or $1.36 per share in the fourth quarter of 2011.

Cash flow from operations was $114.6 million in the quarter. The sales cycle was 16 days while annualized inventory turns were 7 in the quarter. Capital expenditures were $103.2 million, while depreciation was $85.9 million. Core return on invested capital was 30.0% in the reported quarter.

Guidance

Jabil expects net revenue in the range of $4.0 billion to $4.2 billion for the second quarter of 2012. Diversified Manufacturing is expected to grow 25.0% year over year, Enterprise and Infrastructure is anticipated to remain flat year over year, while High Velocity is forecasted to decline 14.0% on a year-over-year basis for the second quarter.

Jabil projects operating income (excluding stock-based compensation) in the $160.0 million to $185.0 million range (4.0% to 4.4% of the total revenue) for the second quarter of 2012.

Jabil expects non-GAAP earnings per share to be between 52 cents and 62 cents for the second quarter. The Zacks Consensus Estimate is currently pegged at 51 cents (Zacks Consensus Estimate includes stock-based compensation).

Recommendation

Jabil provided strong second quarter outlook, anticipating strong top-line growth on the back of a mix shift toward high-margin diversified manufacturing systems. We believe Jabil remains well positioned to grow from the increasing adoption of clean technology and alternative energy. Moreover, the lean cost structure, increasing cash flow generation capabilities and an improving balance sheet are positives for the stock.

However, the company faces strong competition from Flextronics Inc. (FLEX - Snapshot Report) and Sanmina-SCI Corp. (SANM - Snapshot Report), which along with the sluggish economic conditions in Europe and the U.S. may hurt its profitability going forward.

We maintain a Neutral recommendation on Jabil over the long term (6–12 months). Currently, Jabil has a Zacks #3 Rank, which implies a Hold rating on a short-term basis.

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