SANM Sanmina Corporation

Jabil Circuit Inc. (JBL) reported fourth quarter 2011 earnings of 54 cents per share, beating the Zacks Consensus Estimate by a nickel.

Earnings per share (EPS) increased 81.9% year over year from 30 cents (including stock-based compensation but excluding amortization) reported in the year-ago quarter. The strong results were primarily driven by solid top-line growth and operating margin expansion in the quarter.

Operating Performance

Gross profit was $329.2 million, up 14.5% year over year and gross margin increased 30 basis points to 7.7% from the year-ago quarter. This was primarily driven by the favourable product mix.

Operating income (including stock-based compensation) shot up 56.7% year over year to $170.8 million in the reported quarter. Operating margin was 4.0% compared with 2.8% in the year-earlier quarter. Segment wise, Diversified manufacturing operating margin was 6.7% in the quarter. Core operating margin for the Enterprise and Infrastructure segment was 2.6%. High velocity posted a margin of 3.1% in the quarter.

The strong growth in operating margin was primarily attributable to significant decreases in both selling, general and administrative (SG&A) expense and research and development (R&D) expense in the quarter.

SG&A expense decreased 5.2% year over year to $152.2 million, while R&D was down 6.4% year over year to $6.2 million in the quarter.

Net income increased 1.6% year over year to $219.5 million. Net margin was 2.8% in the quarter versus 1.7% in the year-ago period.

Revenue

Revenue increased 11.0% year over year to $4.28 billion in the fourth quarter of 2011 and was in line with the high end of management’s guided range of $4.1 billion to $4.3 billion. This was well above the Zacks Consensus Estimate of $4.18 billion. Higher quarterly revenues were attributable to market share gains, new customer wins and strong growth from emerging markets.

Diversified manufacturing segment revenue (40.0% of the total revenue) increased 10.0% sequentially. Enterprise and Infrastructure segment revenue (32.0% of the total revenue) was up 1.0% quarter over quarter. However, high velocity segment (28.0% of the total revenue) decreased 9.0% sequentially.

Balance Sheet & Cash Flow

Exiting the fourth quarter, cash and cash equivalents were $888.6 million, down from $911.1 million in the prior quarter.

Jabil’s debt level remained flat sequentially in the fourth quarter. Total debt, as of August 31, 2011, was $1.19 billion.

The company’s net cash balance (cash less debt including the current portion) was a deficit of $298.1 million or $1.36 per share in the fourth quarter of 2011, compared with $276.5 million or $1.24 per share in the third quarter of 2011.

Cash flow from operations was $303.6 million in the quarter. The sales cycle was 8 days while annualized inventory turns were 7 in the quarter. Capital expenditures were $138.0 million, while depreciation was $84.9 million. Core return on invested capital was 30.0% in the reported quarter.

Guidance

Jabil expects net revenue in the range of $4.3 billion to $4.5 billion for the first quarter of 2012. Diversified Manufacturing is expected to grow 3.0% sequentially, Enterprise and Infrastructure is anticipated to remain flat year over year, while High Velocity is forecasted to increase 6.0% on a sequential basis in the first quarter.

Jabil forecasts operating income for the first quarter of 2012 (excluding stock-based compensation) in the $185.0 million to $205.0 million range (4.3% to 4.5% of the total revenue).

Jabil expects non-GAAP earnings per share to be between 62 cents and 70 cents for the first quarter. The Zacks Consensus Estimate is currently pegged at 55 cents (Zacks Consensus Estimate includes stock-based compensation).

Recommendation

Jabil provided a robust first 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) and Sanmina-SCI Corp. (SANM), which along with the worsening economic conditions in Europe and the U.S. may hurt its profitability going forward.

We maintain an Outperform rating on Jabil over the long term (6–12 months). Currently, Jabil has a Zacks #4 Rank, which implies a Sell rating on a short-term basis.

 
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