Jacobs JV Concludes Pricing

Recently, Jacobs Engineering Group Inc. (JEC - Analyst Report) announced that the joint venture (JV) between Jacobs-Serco-Lockheed Martin has concluded AWE Pricing Arrangements, involving the contract to manage and operate Atomic Weapons Establishment (AWE) plc in the United Kingdom. The new pricing arrangements will be effective from April 1, 2013 through March 31, 2018.

Jacobs, which has a one-third share in AWE Management Limited (AWE ML), is a joint venture formed in 2000 between the company and Lockheed Martin and Serco. The joint venture is aimed at managing AWE plc on behalf of the UK Ministry of Defence (MOD).

The conclusion of recent negotiations toward pricing arrangements carries a total value to AWE ML of around 1 billion GBP($1.59 billion) per year. However, approximately 40% of the above value has been planned to be invested in capital projects.

The infrastructure market is improving worldwide. In such a scenario, Jacobs is well poised to take advantage of such strong secular growth trends supported by its low-cost position relative to its competitors, such as Fluor Corporation (FLR - Analyst Report) and Foster Wheeler AG (FWLT - Analyst Report).

Although sustainable, such long-standing associations with government clients are not problem free. Prolonged federal budget constraints or unforeseen termination of government funded projects may drastically reduce order flow, marring profitability.

However, Jacobs' recent mix shift toward higher-margin private projects looks convincing enough to guard the company well against such unlikely state of affairs. Also, with controlled expenses and on-time project execution, Jacobs is expected to retain its long-term relationships with its core clientele.

We currently have a long-term Neutral recommendation on the stock. Moreover, the company maintains a Zacks #3 Rank, which translates into a short-term (1-3 months) Hold rating. The Zacks Consensus EPS Estimate for the third quarter is 76 cents.