We recently reiterated our Neutral recommendation on Jacobs Engineering Group Inc. (JEC - Analyst Report), a leading provider of professional, technical and construction services to industrial, commercial and governmental clients. The company’s mounting global coverage and diversified portfolio have helped it attain a formidable position in the infrastructure industry.
However, judging by the degree of uncertainty Jacobs still faces with regard to competitive pressure and cyclical industry conditions, we believe it wise not to be too optimistic about its future performance.
Jacobs, a dominant player in engineering and construction business, is expected to be hugely benefited from the constant development in the aviation, rail, water, transit and telecom business. Additionally, the rapid growth in oil, gas and mining industry is also likely to be a major growth driver for the company’s process, scientific and systems consulting services.
The company has been continuously winning a contract galore from the federal governments and other clients, expanded across services and geographies. In the second quarter of fiscal 2012, Jacob confirmed receiving a bunch of contracts from Tennessee Valley Authority, Civil Engineering and Development Department of the Government of Hong Kong Special Administrative Region, etc. We anticipate that such constant inflow of contracts and agreements will continue to bolster the company’s growth going forward.
Jacobs’ flexible cost structure and impressive track record of in-time project execution will help it retain its long-term relationships with its core customers. Additionally, the company’s transformation toward higher-margin work, steady backlog and the strategy of better labor utilization are likely to accelerate the company’s growth going forward.
However, the picture is not really as clear as it appears as certain bottlenecks still continue to be worrisome for the company. Jacobs’ business is highly dominated by some core clients. Hence, there always remains a risk of shift in loyalty or loss in client business due to alarming competition prevailing in the industry.
The company directly competes with Fluor Corporation (FLR - Analyst Report), Quanta Services, Inc. and Adama Technologies Corp. . These companies may pose a huge threat to Jacobs’ financial performance, affecting its profitability.
The company’s increasing dependence on third-party suppliers to get the supply of equipment and resources may result in many serious issues such as deferred project delivery, loss of goodwill or even order cancellation by clients. This is because in the uncertain economic environment with increasing cost, these third parties often face several difficulties to get sufficient financing to help fund their operations resulting in delay in its product supply.
Jacobs has been assisting a huge number of federal government clients in UK, US and other nations. However, the increasing budget constraints arising from current fiscal adversities are highly pressurizing the services of the public sector. Consequently, a decline in government’s infrastructure spending may impede the company’s profitability. Jacobs needs to focus on battling these downsides better in order to make the entire picture look more favorable.
Hence, owing to the risk-reward zone the company continues to prevail in, we find it wise to maintain a sideline stance for the time being. In the short run, we have a Zacks #3 Rank on the stock which translates into a short-term Hold rating.