announces the list of stocks featured in the Analyst Blog. Every day the Zacks Equity Research analysts discuss the latest news and events impacting stocks and the financial markets. Stocks recently featured in the blog include: ConAgra (NYSE: CAG), Rite Aid (NYSE: RAD), Lennar (NYSE: LEN), Jabil Circuit Inc. (NYSE: JBL) and Paychex Inc. (Nasdaq: PAYX).

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Here are highlights from Thursday’s Analyst Blog:

Weak Jobless Claims

Stocks will likely continue to reflect what Fed Chair Bernanke said, or didn’t say, on Wednesday even as we got another negative labor market report this morning. The weak growth picture emerging out of the Fed chief’s news conference and today’s Jobless Claims report will likely force stocks to give back the gains of the last few days.

I discuss the disconcerting aspect of what the Fed chief said Wednesday below, but let’s look at this morning’s weaker than expected labor market report first.

Jobless Claims increased 9 thousand to 429 thousand, while the four-week average remained unchanged at 426 thousand. This is the 11th week running that the jobless claims number has remained above the 400 thousand level. Today’s number is a reversal of last week’s report and takes us back to the negative upward trend that we have been consistently seeing since early April. This does not bode well for the June non-farm payroll report coming early next month.

With respect to the Fed, it delivered as expected on most issues. It left interest rates unchanged, announced the end of QE2, and reiterated a positive economic outlook for the second half of the year. Importantly, the Fed did not tip its hand on another round of monetary stimulus.

But one negative thing stood out for me in the Fed chief’s news conference and this pertained to the causes of the ongoing weakness in the economy. Everybody, including the Fed, expects the weakness to be temporary and restricted to the first half of the year, with ‘normal’ growth resuming in the second half of the year. The consensus narrative assigns the blame for the weakness to factors such as Japan, high fuel costs, and inclement weather.

On Wednesday, the Fed chief came across as tentative and uncertain in explaining the causes of the softness. Granted, he did mention the above referred factors (Japan/Fuel), but stated that they were ‘partly’ to blame. Here is a direct quote of what Bernanke said on Wednesday, as reported by the Wall Street Journal:

“We don’t have a precise read on why this slower pace of growth is persisting…Maybe some of the headwinds that had been concerning us, like weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues, some of these headwinds may be strong or more persistent than we had thought.”

This is a far less benign take on the ongoing economic weakness than a few transitory factors holding us back. if the causes of the slowdown are more structural and enduring, then we may have to recalibrate our growth outlook for the rest of the year.

Aside from Fed watch and the labor market report, we also have a few earnings reports this morning. ConAgra (NYSE: CAG) modestly missed on earnings, but beat on revenues. Rite Aid (NYSE: RAD) beat both earnings and revenue expectations, while homebuilder Lennar (NYSE: LEN) came ahead of expectations.

Jabil Reports Mixed 3Q

Jabil Circuit Inc. (NYSE: JBL) reported third quarter 2011 earnings of 49 cents per share, which missed the Zacks Consensus Estimate by a penny.

However, earnings per share (EPS) increased 75.0% year over year from 28 cents (including stock-based compensation but excluding amortization) reported in the prior-year quarter.

The strong results were driven by solid revenue growth in the quarter (up 22.2% year over year to $4.23 billion).

Operating Performance

Net income surged 83.4% year over year to $109.9 million. Net margin was 2.6% in the quarter compared with 1.7% in the year-ago period.

The solid bottom-line growth was driven by operating margin expansion in the quarter. Operating income shot up 51.1% year over year to $157.7 million in the first quarter. Operating margin was 3.7% compared with 3.0% in the year-earlier quarter.

Segment wise, Diversified manufacturing margin was 6.2% in the quarter. Core operating margin for the Enterprise and Infrastructure segment was 3.9%. High velocity posted a margin of 2.0% in the quarter.

The strong growth in operating margin fully offset a slight decline in gross margin. Although gross profit increased 21.5% year over year from $318.4 million in the quarter, gross margin stood at 7.5% in the quarter, down from 7.6% in the prior-year quarter.

The strong growth in operating margin was primarily driven by modest increases in selling, general and administrative expense (SG&A) and research and development expense (R&D), which were outpaced by strong revenue growth in the quarter.

SG&A expense increased 1.8% year over year to $154.1 million, while R&D was up 3.0% year over year to $6.5 million in the third quarter.


Jabil expects net revenue in the range of $4.1 billion to $4.3 billion for the fourth quarter of 2011. Diversified Manufacturing is expected to grow 7.0% sequentially, Enterprise and Infrastructure is anticipated to increase 3.0% sequentially, while High Velocity is forecasted to decline 13.0% on a sequential basis in the fourth quarter.

Jabil forecasts operating income for the fourth quarter (excluding stock-based compensation) in the $165.0 million to $185.0 million range (4.0% to 4.3% of the total revenue).

Jabil expects non-GAAP earnings per share to be between 52 cents and 60 cents for the fourth quarter. The Zacks Consensus Estimate is currently pegged at 48 cents (Zacks Consensus Estimate includes stock-based compensation).

Jabil expects to achieve revenues of $16.4 billion for fiscal 2011 (up approximately 22.3% year over year) and $20 billion by 2013.


Jabil provided a robust fourth quarter outlook, anticipating strong top-line growth for fiscal 2011 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, a lean cost structure, increasing cash flow generation capabilities and an improving balance sheet are positives for the stock.

Paychex Disappoints in Q4

Paychex Inc. (Nasdaq: PAYX) reported fourth-quarter fiscal 2011 earnings of 33 cents per share, which came in line with the Zacks Consensus Estimate. Though the quarter’s results indicate an improving client retention rate and higher checks per client, lower sale of new units remains an overhang.


Paychex reported fourth-quarter 2011 revenues of $522.7 million, which missed the Zacks Consensus Estimate of $542.0 million, but increased 5.3% from $496.2 million reported in the year-ago quarter. The revenue upside can be attributed to year-over-year growth in both checks processed per client and the HR services client base.

Payroll Service segment revenue increased 4.6% from the year-ago quarter to $356.9 million, attributable to the contribution from SurePayroll Inc., acquired in February. Excluding the SurePayroll contribution, Payroll revenue would have grown only 3.0%.

Continued growth in checks processed per client as well as revenue per checks also added to the growth. However, the increase in new unit sales was sluggish, due to the limited number of new companies commencing business during the quarter.

The Human Resource Services segment generated $153.5 million in revenues, up 8.7% from the prior-year quarter. The improvement was partly due to the contribution from ePlan Services, which was acquired in May. The number of client employees served and the number of clients grew during the quarter, contributing to the increase. Moreover, demand for a new product, HR Essentials, also added to the segment’s revenue growth.


For fiscal 2012, Paychex expects a 5–7% increase in Payroll Service revenues compared to the year-ago quarter. Human Resource Services revenues are expected to increase in the range of 12.0% to 15.0%.

Total service revenue is likely to grow in the range of 7% to 9%. The company expects a 12–14% decline in interest on funds held for clients and a roughly 2% increase in net investment income.

Interest on funds held for clients and investment income for fiscal 2012 are expected to be impacted by the low interest rate environment. However, investment of cash generated from operations is expected to continue, so investment income will increase.

Net operating income is expected in the range of 35–36% of total service revenue. The effective tax rate is expected to be roughly 35% and net margin is projected at between 5% and 7%.

The guidance for fiscal 2012 includes anticipated results from Paychex’s recent acquisition of SurePayroll Inc. and its ePlan Services. The acquisitions are expected to have approximately a 2% positive impact on revenue, nonetheless resulting in earnings dilution of around 1 cent per share due to amortization on acquired intangible assets and some one-time acquisition costs.

Our Take

The fourth quarter has been lackluster over the past few years, relative to the other three quarters. Although results matched the company’s guidance in the fourth quarter of 2011, we are disappointed with the top line, which was well below our estimates.

However, we remain positive on management’s positive commentary regarding continued investments in product development and synergies from the recent acquisitions. We also believe that cost control measures will remain catalysts for Paychex, going forward.

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