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Jacobs’ Project Execution Strong Amid Stiff Competition

Zacks

Jacobs Engineering Group Inc. JEC has been benefiting from its focus on high-value businesses and efficient project execution. Meanwhile, elevated construction spending in the United States is expected to facilitate the company in driving profitability.

Shares of this CA-based construction and technical services company have gained 26.6% over the past three months, outperforming its industry’s 21% rally. Its price performance is backed by an impressive earnings surprise history. The company surpassed earnings estimates in six of the trailing seven quarters.

Earnings estimates for fiscal 2019 have moved 1.1% north over the past 60 days. This upside reflects analysts’ optimism surrounding the company’s future earnings potential.


Let’s delve deeper into the factors that bode well for this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Key Growth Drivers

Jacobs is reinforcing business on the back of increased focus on highest-margin growth businesses. In this regard, the company has agreed to offload its Energy, Chemicals and Resources (“ECR”) business unit to Australia’s WorleyParsons Ltd. in October 2018. The deal, which is expected to close within Jun 30, is valued at $3.3 billion. Jacobs will receive $2.6 billion in cash and around $700 million worth of shares that equals to about 11% stake in WorleyParsons.

Meanwhile, efficient project execution has been one of the main characteristics driving Jacobs’ performance over the last few quarters. The company’s ongoing contract wins are a testimony to the fact. Jacobs believes that new contract wins will not only continue to generate steady revenues in the upcoming quarters but also boost its competency going forward.

Backlog (excluding ECR) at the end of fiscal first-quarter 2019 was $20.3 billion, increasing 8% year over year. Higher-margin line of businesses — Aerospace, Technology and Nuclear (“ATN”) and Buildings, Infrastructure and Advanced Facilities (“BIAF”) — continues to see a robust pipeline of government and infrastructure-spending programs.

Jacobs is off to a strong start to fiscal 2019, with double-digit top and bottom-line growth. In first-quarter fiscal 2019, the company’s revenues grew 12% year over year (on a pro-forma basis). Its ATN line of business was a major driver of revenue growth, with a 23% year-over-year increase.

The company’s three-year targets, including an organic revenue CAGR of 3-5%, adjusted operating margin improvement of 125-175 basis points (bps), double-digit adjusted EBITDA growth and ROIC expansion of 100-150 bps, seem encouraging.

Overall, higher construction spending in the United States and Trump’s impetus to boost infrastructure spending are the primary growth catalysts for construction services providers like Jacobs, Quanta Services, Inc. PWR, KBR, Inc. KBR and Altair Engineering Inc. ALTR.

Headwinds

Low-entry barriers in engineering, architectural, consulting and designing market segments have escalated threats of market rivalry for Jacobs. The company intends to underpin its business through increased business internationalization. In fiscal 2018, approximately 36% of revenues were earned from clients outside the United States.

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