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On Nov 25, 2013, we upgraded our recommendation on Jacobs Engineering Group Inc. (JEC - Analyst Report) to Outperform from Neutral, based on the company’s strong growth potential.

Why the Upgrade?

Jacobs has been expanding its contracts pipeline, resulting in healthy organic growth. In the recent past, the company won contracts in different parts of the world. Jacobs has expertise in several sectors including oil and gas, petrochemical, mining, IT services and power. The growth in the National Government end-market has been noteworthy, with the company receiving eight contracts in the fiscal fourth quarter of 2013.

Additionally, the company’s inorganic growth has been impressive over the years with scope for future growth. In fiscal fourth-quarter 2013, management announced many acquisitions, including Guimar Engenharia, Ilitha and Sinclair Knight Merz, to name a few. These acquisitions are either complete or awaiting closures, subject to regulatory approvals. With cash and cash equivalents of $1.3 billion, exiting fiscal 2013, the company sees scope for further acquisitions in coming quarters.

Our belief on continued long-term growth for the company is strengthened by its solid backlog. Exiting the fourth quarter of fiscal 2013, Jacobs’ backlog was $17.2 billion, an 8.2% year-over-year increase. The Field Services segment accounted for 35.5% of the backlog and the Technical Professional Services segment the remaining 64.5%.

Another important fact about the company is its strong relationship-based model, which leads to repeat business. On an average around 65% of its business is obtained through long-term relationship with customers, reflected in the 94.1% repeat business done in the fiscal fourth quarter of 2013.  

Other Stocks to Consider

Jacobs currently carries a Zacks Rank #3 (Hold). Other better-ranked stocks in the industry include VSE Corp. (VSEC - Snapshot Report)), KB Home (KBH - Analyst Report) and M/I Homes, Inc. (MHO - Snapshot Report). While VSE Corp has a Zacks Rank #1 (Strong Buy), KB Home and M/I Homes hold a Zacks Rank #2 (Buy).

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