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Shares of electronic parts manufacturer Jabil Circuit Inc. (JBL) have declined nearly 1% in Tuesday trading as fourth quarter 2010 revenue missed Street expectations.

However, Jabil’s reported earnings (including stock-based compensation expense and one-time expenses) increased significantly in the quarter to 52 cents per share, beating Street expectations of 48 cents. Earnings per share were above management’s guidance range of 45 cents to 50 cents.

Earnings (excluding stock-based compensation but including one-time charges) leapt 251.7% year over year to 35 cents per share in the fourth quarter of 2010, compared to 10 cents per share in the prior-year quarter. This was 5 cents below the Zacks Consensus Estimate.

This strong growth was driven by better-than-expected top line growth and a stronger operating margin in the quarter.

In fiscal 2010, earnings (excluding stock-based compensation but including one-time charges) shot up 154.8% year over year to $1.05 per share, compared to 41 cents in the prior year. This was well below the Zacks Consensus Estimate of $1.14 for fiscal 2010.

Revenue

Jabil posted revenue of $3.86 million in the fourth quarter, up 37.9% year over year from $2.80 billion in the year-ago quarter, slightly below the Street estimate of $3.89 billion and in line with management’s guidance of $3.8 billion to $4.0 billion. However, this was in sync with the Zacks Digest Estimate. The year-over-year increase was the result of more stable demand and easier comps in the quarter.

Fiscal 2010 revenue increased 14.8% year over year to $13.41 billion, compared to $11.68 billion in fiscal 2009. This was slightly below the Zacks Consensus Estimate of $13.43 billion.

While Jabil benefited from strengthening end markets in the quarter, we remain cautious about top-line growth in the near term due to a sluggish macro-economic environment, particularly in Europe.

Margin

Gross profit in the fourth quarter of 2010 was $287.51 million, up 50.6% year over year. Gross margin increased 60 basis points to 7.4% in the quarter. In fiscal 2010, gross profit soared 39.7% year over year to $1.00 billion and gross margin expanded 130 basis points. The strong growth was primarily driven by higher revenue and better cost absorption.

Operating profit (excluding stock based compensation but including one-time charges) in the fourth quarter was $120.36 million, up 121.0% year over year. Operating margin increased 120 basis points to 3.1% in the quarter.

This was primarily driven by stringent cost control as operating expenses (selling, general and administrative and research and development), as a percent of revenues, decreased 60 basis points in the quarter.

On a full year basis, operating profit increased 90.5% year over year to $386.32 million and operating margin increased 120 basis points to 2.9%.

Balance Sheet and Cash Flow

Exiting the fourth quarter of 2010, cash and cash equivalents were $744.33 million as compared to $600.35 million posted in the prior quarter.

We believe Jabil’s fairly high level of debt may limit financial flexibility going forward. Long-term debt as of August 31, 2010, was $1.02 billion, compared to $1.04 billion as of May 31, 2010.

The company’s net cash balance (cash less debt including current portion) was a deficit of $442.14 million or $2.05 per share in the fourth quarter of 2010 versus $525.7 million or $2.43 per share in the third quarter of 2010.

Guidance

Jabil expects first quarter 2011 revenue of between $3.9 billion and $4.0 billion, below market expectations of $4.08 billion.

Jabil forecasts first quarter 2011 earnings to be in the range of 43 cents to 47 cents per share, or between 53 cents and 57 cents excluding amortization expenses and stock-based compensation charges, well above Street expectations of 53 cents.

Recommendation

We expect Jabil to achieve strong top-line growth over the long term, riding on new business wins from major original equipment manufacturers (OEMs) such as Cisco Systems Inc. (CSCO), a recovery in end-market demand, new programs ramping up and resurgence in IT enterprise spending.

We believe Jabil will benefit from strong growth in the Mobility, Aerospace and Defense, Healthcare, Instrumentation and Industrial, and Networking and Storage segments over the long term. However, intense competition from Benchmark Electronics (BHE), Flextronics International Ltd. (FLEX) and Celestica Inc (CLS) and a softer demand environment is of concern.

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.

Disclosure: No position

Source: Jabil's 4Q Revenue Slips: Results In Line With Estimates