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Jacobs (JEC) Displays Bright Prospects Amid Macro Headwinds


On Sep 11, we issued an updated research report on premium technical services company, Jacobs Engineering Group Inc. JEC.

Over the last month, shares of this Zacks Rank #3 (Hold) company yielded a return of 3.6%, outperforming 2.2% growth recorded by the industry.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Existing Scenario

Jacobs has been steadily enhancing its business and brand status on the back of organic growth initiatives. In the last few months, the company has secured a number of contracts from renowned institutions and public-sector agencies like the Royal Dutch Shell plc RDS.A, Chevron Corporation CVX, Exxon Mobil Corporation XOM, Sellafield Ltd, National Aeronautics and Space Administration, and the U.S. Army. Notably, elevated transportation spending of the government authorities of Australia, the U.K. and the United States has largely increased Jacobs’ contract-winning prospects for the near term.

In addition, Jacobs is trying to reinforce its business on the back of diligent restructuring moves. In two years’ time, the company has secured cost savings of more than $285 million, by successfully realigning its operations into four lines of businesses, as well as consolidating and rightsizing more than 90 offices across the globe. Moreover, it recently (Aug 7, 2017) signed a deal to acquire CH2M HILL Companies Ltd. for $2.85 billion. On the back of this move, Jacobs estimates to accrue nearly $150 million worth of cost synergies. Furthermore, this buyout will likely make the company a $15-billion global solutions provider in the market, going forward.

Jacobs is highly committed toward its shareholders and intends to provide them higher returns through lucrative share repurchase and dividend programs. In January 2017, the company announced the initiation of its cash dividend program. This reflects the company’s robust long-term financial outlook, expectations for a robust operating performance and anticipation of solid free cash flow generation. In addition to its cash dividend program, Jacobs will continue with its ongoing share repurchase program. In July 2015, the company had announced a second phase $500-million share buyback program to be implemented over the next three fiscal years.

However, in third-quarter fiscal 2017, Jacobs’ revenues dipped 6.6% year over year. On a segmental basis, the top-line results of Petroleum & Chemicals, Aerospace & Technology and Industrial segments dropped 21.7%, 12.3% and 3.5%, respectively. Dismal pricing conditions in the oil and gas market have been marring Jacobs’ Petroleum & Chemicals segment’s businesses.

Moreover, conclusion of several field services projects is responsible for weighing over the company’s Industrial businesses. Persistence of these issues, as well as reduced government spending in major end-markets might also weaken the company’s top-line performance in the quarters ahead.

Also, we believe that low-entry barriers in the engineering, architectural, consulting and designing market segments have escalated threats of market rivalry for Jacobs. Poor competency or business inefficiencies over the long run might shrink the market share and profitability of the company from such business fragments.

Moreover, the maintenance and construction sites of the company are subject to certain risks related to safety issues. Any untoward incident at these sites might generate severe financial losses for Jacobs.

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