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On Nov 21, we maintained our Neutral recommendation on URS Corporation (URS - Analyst Report) owing to our concerns about the company’s moderate third-quarter earnings performance.

Why the Reiteration?

On Nov 6, URS Corporation reported third-quarter 2013 non-GAAP earnings of $1.42 per share, which beat the Zacks Consensus Estimate of $1.20 by 18.3%. The company reported GAAP net income of $88.8 million or $1.20 per share in third quarter 2013, down from $106.7 million or $1.43 per share in the prior-year quarter.

The company benefited from its initiatives to diversify its business across both private and public sectors, which negated the difficult conditions arising due to unprecedented government shutdown and sequestration.

Total revenue in the quarter was $2.74 billion, down 7.2% compared with $2.95 billion in the prior-year quarter and missed the Zacks Consensus Estimate of $2.96 billion. The decline in revenues was due to an after-tax goodwill impairment charge in the quarter. However, the company benefited from an after-tax income from its acquisition of Flint Energy Services and a positive currency gain from Canada.

Following the release of the third-quarter results, the Zacks Consensus Estimate for fiscal 2013 contracted 6.8% to $1.10 per share. Moreover, the Zacks Consensus Estimate for fiscal 2014 also declined 7.1% to 91 cents per share.

Demand for URS Corp’s services is cyclical and vulnerable to economic downturns as well as reductions in government and private industry spending.  If the economy remains weak or client spending declines further, then its revenues, profits and financial condition may deteriorate. Global economic conditions have caused clients to delay, curtail or cancel proposed and existing projects. This decreases the overall demand for services, leading to weak financial results.

The company’s largest clients are from the federal market sector. Federal Services revenues were $538.9 million in third quarter, down 22.7% from $682.8 million a year ago.

However, the improving capital spending environment will continue to benefit both the power and industrial and commercial sectors. Recovery in the power sector intensified in 2012, generating the consecutive year-over-year growths in annual revenues since 2008.

In addition, business in North America gained momentum during the year and the federal sector business continued to deliver record revenues. URS Corp.’s strategy to setup a diversified business is also a driving factor. The company is focused on building a balanced portfolio in four key market sectors.

Other Stocks to Look For

Currently, URS Corp. retains a Zacks Rank #3 (Hold).

However, some better-ranked energy and utility stocks include VSE Corp. (VSEC - Snapshot Report), AO Smith Corp. (AOS - Snapshot Report) and EnerSys (ENS - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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