We are upgrading Jabil Circuit Inc. (JBL) to Outperform from our previous Neutral rating. Jabil’s results continued to improve in each of the last four quarters and estimates for the fourth quarter and full year 2010 have soared, following the company’s strong third quarter 2010 results that beat the Zacks Consensus Estimate.
Third Quarter Highlights
Third quarter 2010 revenues and earnings both jumped on a year-over-year and sequential basis, attributable to a significant operating margin expansion and growth across end markets.
Each of the segments grew above management’s expectation, given a robust end-market demand. The company continued to witness a strong sequential growth in the Healthcare, Instrumentation and Industrial segments and a recovery in Mobility led to a leap in revenues for the quarter.
Core earnings or non-GAAP earnings (excluding one-time items and discontinued operations but including stock-based compensation expenses) were 28 cents per share in the quarter, up from a loss of 2 cents in the prior-year quarter. The reported earnings beat the Zacks Consensus Estimate of 26 cents per share. Improvement in profitability came from an increased focus on operations.
Total revenue for the quarter was $3.46 billion, an increase of 32.1% from $2.62 billion in the year-ago quarter. On a sequential basis, revenues grew 15% and were above management’s guidance in the range of $3.1 billion to $3.3 billion or a growth of 3% to 10%. The rise in revenues is mainly due to increased customer orders and growth in all of the sectors.
Fourth Quarter Guidance
Despite substantial European exposure, Jabil provided an upbeat fourth quarter guidance, well above the Consensus Estimate. Jabil estimates the full year 2010 to be a record year in terms of both revenues and earnings.
Core EPS for the fourth quarter is expected to be in the range of 45 cents to 50 cents, up 13% to 25% sequentially. The company estimates net revenue for its fourth quarter of 2010 to be in the range of $3.8 billion to $4.0 billion, an increase of 10% to 16% sequentially and above the Consensus Estimate of $3.40 billion.
We have raised our 2010 revenue estimate by 6.3% and earnings per share estimate by 15.2%. We expect Jabil to witness strong revenue, margins and earnings growth by the end of fiscal 2010 and in 2011 on account of new business wins from major OEMs, an increase in customer orders, recovery in end market demand and resurgence in information technology enterprise spending.
Jabil’s business outlook is improving faster than the industry, with an expectation for potential revenue growth based on a recovery in the overall EMS industry this year and the next.
The company will likely benefit from a strong growth in the Mobility, Aerospace and defense, Healthcare, Instrumentation and Industrial, Networking, Computing and Storage segments.
Given improvements in Jabil’s operations, strength in the non-traditional sector, new business wins, operating leverage and expectations of potential revenue growth from a recovery in the EMS industry, we do believe that the stock should trade at a P/E closer to its growth rate.
The stock has a Zacks Rank of #1, a short-term ‘Buy’ rating and a longer-term Outperform recommendation.