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Jacobs (J) Banks on Solid Backlog Growth Amid Currency Risks
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Jacobs Solutions Inc. (J - Free Report) is benefiting from solid contributions from its operational segments, especially People & Places Solutions (“P&PS”) segment, reflecting growth in backlog and operating profit. Also, various growth initiatives bode well for the company.
Recently, Jacobs reported second-quarter fiscal 2023 (ended Mar 31, 2023) results, with earnings and revenues beating the Zacks Consensus Estimate by 1.7% and 2.5%, respectively. Also, the top and bottom lines grew year over year by 6.4% and 5%, respectively. The upside was attributable to solid performance across the portfolio, led by People and Places Solutions operating profit growth of 21% year over year.
However, this leading provider of professional, technical and construction services is facing headwinds in the form of foreign exchange risks as well as high cost and expenses.
Earnings estimates for fiscal 2023 have moved south to $7.36 per share from $7.38 per share over the past 30 days. This depicts analysts' concern over the company’s growth prospects.
Let’s discuss the factors broadly.
Factors Favoring Jacobs
Jacobs has been witnessing increased momentum in critical infrastructure that reflects solid performance across its portfolio. In second-quarter fiscal 2023, revenues from P&PS segment totaled $2.35 billion, up 8.4% year over year. This segment’s operating profit grew 20.5% from the prior-year quarter to $232.2 million with quarter-end backlog of $17.6 billion, up from $16.9 billion a year ago. The upside was backed by strong legislative drivers spending in federal, state and local initiatives.
In the second-quarter fiscal 2023, Jacobs’ Critical Mission Solutions (“CMS”) and Divergent Solutions segments witnessed revenues of $1.19 billion and $241.2 million, up 5% and 0.8%, respectively, year over year. At fiscal second-quarter end, CMS segment’s backlog was $8.14 billion, up from $7.51 billion a year ago, backed by well-funded government programs and cyber, U.S. Department of Defense or DoD, mission-IT, space, nuclear, as well as 5G-related projects, including a nuclear remediation program with the Department of Energy awarded in fiscal 2022. The consolidated backlog of Jacobs at the end of the quarter amounted to $29 billion, up 4% from a year ago.
Most importantly, Jacobs undertook a strategic portfolio transformation initiative on May 9, 2023 wherein its board of directors approved the separation of the CMS business from the parent company. This separation is intended to create two independent companies operating separately and focusing on their respective distinct strategies and operating needs, driving further momentum in the businesses. This initiative will create a higher growth and margin business portfolio focused on critical infrastructure and sustainability. The company anticipates this initiative to create value for all stakeholders. Jacobs expects to complete this transaction in the second half of fiscal 2024.
Also, in 2022, Jacobs undertook a “Boldly Moving Forward” strategy that comprises operational discipline to capture the high-growth opportunities emerging across Climate Response, Data Solutions and Consulting & Advisory. The company has been executing this strategy well and is creating compelling returns while advancing sustainability and social value in global communities.
Headwinds
Shares of Jacobs have declined 5.1% in the year-to-date period against the Zacks Technology Services industry’s growth of 10.4%.
Image Source: Zacks Investment Research
Jacobs is facing foreign currency risks as the constant appreciation of the U.S. dollar with respect to other major currencies, such as the euro and yen, is most likely to continue hurting its overseas market revenues as well as profitability. In fiscal second-quarter 2023, the CMS segment witnessed negative impacts on revenues from unfavorable foreign currency translation of $25.5 million (up from $10.1 million in the prior year period). Also, in the P&PS segment, foreign currency translation had a $51.2 million unfavorable impact on the revenues of its international businesses.
Although Jacobs is efficiently managing its working capital and taking certain initiatives to combat cost woes, labor-related medical costs, IT-related investment costs as well as other investments, may put pressure on margins. In second-quarter fiscal 2023, adjusted non-allocated corporate costs were $60 million, up 46.3% year over year due to inflationary pressure in health care and digital investments. For the remaining of fiscal 2023, the company expects quarterly non-allocated corporate costs to be on par with Q2 fiscal 2023 due to inflationary pressure in healthcare costs and incentive costs.
Some better-ranked stocks from the Zacks Business Services sector are:
SPX Technologies, Inc. (SPXC - Free Report) currently sports a Zacks Rank #1. SPXC has a trailing four-quarter earnings surprise of 28.4%, on average. Shares of the company have gained 52.2% in the past year.
The Zacks Consensus Estimate for SPXC’s 2023 sales and EPS indicates growth of 11.7% and 26.5%, respectively, from the year-ago reported levels.
SPS Commerce, Inc. (SPSC - Free Report) currently carries a Zacks Rank #2 (Buy). SPSC delivered a four-quarter average earnings surprise of 16.4%. The company’s shares have risen 51.6% in the past year.
The Zacks Consensus Estimate for SPSC’s 2023 sales and EPS indicates growth of 16.9% and 14%, respectively, from the prior-year reported figures.
Omnicom Group Inc. (OMC - Free Report) currently has a Zacks Rank #2. OMC came up with a four-quarter average earnings surprise of 9.1%. The stock has risen 20.6% in the past year.
The Zacks Consensus Estimate for OMC’s 2023 sales and EPS indicates growth of 3% and 6.9%, respectively, from the prior-year reported figures.
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Jacobs (J) Banks on Solid Backlog Growth Amid Currency Risks
Jacobs Solutions Inc. (J - Free Report) is benefiting from solid contributions from its operational segments, especially People & Places Solutions (“P&PS”) segment, reflecting growth in backlog and operating profit. Also, various growth initiatives bode well for the company.
Recently, Jacobs reported second-quarter fiscal 2023 (ended Mar 31, 2023) results, with earnings and revenues beating the Zacks Consensus Estimate by 1.7% and 2.5%, respectively. Also, the top and bottom lines grew year over year by 6.4% and 5%, respectively. The upside was attributable to solid performance across the portfolio, led by People and Places Solutions operating profit growth of 21% year over year.
However, this leading provider of professional, technical and construction services is facing headwinds in the form of foreign exchange risks as well as high cost and expenses.
Earnings estimates for fiscal 2023 have moved south to $7.36 per share from $7.38 per share over the past 30 days. This depicts analysts' concern over the company’s growth prospects.
Let’s discuss the factors broadly.
Factors Favoring Jacobs
Jacobs has been witnessing increased momentum in critical infrastructure that reflects solid performance across its portfolio. In second-quarter fiscal 2023, revenues from P&PS segment totaled $2.35 billion, up 8.4% year over year. This segment’s operating profit grew 20.5% from the prior-year quarter to $232.2 million with quarter-end backlog of $17.6 billion, up from $16.9 billion a year ago. The upside was backed by strong legislative drivers spending in federal, state and local initiatives.
In the second-quarter fiscal 2023, Jacobs’ Critical Mission Solutions (“CMS”) and Divergent Solutions segments witnessed revenues of $1.19 billion and $241.2 million, up 5% and 0.8%, respectively, year over year. At fiscal second-quarter end, CMS segment’s backlog was $8.14 billion, up from $7.51 billion a year ago, backed by well-funded government programs and cyber, U.S. Department of Defense or DoD, mission-IT, space, nuclear, as well as 5G-related projects, including a nuclear remediation program with the Department of Energy awarded in fiscal 2022. The consolidated backlog of Jacobs at the end of the quarter amounted to $29 billion, up 4% from a year ago.
Most importantly, Jacobs undertook a strategic portfolio transformation initiative on May 9, 2023 wherein its board of directors approved the separation of the CMS business from the parent company. This separation is intended to create two independent companies operating separately and focusing on their respective distinct strategies and operating needs, driving further momentum in the businesses. This initiative will create a higher growth and margin business portfolio focused on critical infrastructure and sustainability. The company anticipates this initiative to create value for all stakeholders. Jacobs expects to complete this transaction in the second half of fiscal 2024.
Also, in 2022, Jacobs undertook a “Boldly Moving Forward” strategy that comprises operational discipline to capture the high-growth opportunities emerging across Climate Response, Data Solutions and Consulting & Advisory. The company has been executing this strategy well and is creating compelling returns while advancing sustainability and social value in global communities.
Headwinds
Shares of Jacobs have declined 5.1% in the year-to-date period against the Zacks Technology Services industry’s growth of 10.4%.
Image Source: Zacks Investment Research
Jacobs is facing foreign currency risks as the constant appreciation of the U.S. dollar with respect to other major currencies, such as the euro and yen, is most likely to continue hurting its overseas market revenues as well as profitability. In fiscal second-quarter 2023, the CMS segment witnessed negative impacts on revenues from unfavorable foreign currency translation of $25.5 million (up from $10.1 million in the prior year period). Also, in the P&PS segment, foreign currency translation had a $51.2 million unfavorable impact on the revenues of its international businesses.
Although Jacobs is efficiently managing its working capital and taking certain initiatives to combat cost woes, labor-related medical costs, IT-related investment costs as well as other investments, may put pressure on margins. In second-quarter fiscal 2023, adjusted non-allocated corporate costs were $60 million, up 46.3% year over year due to inflationary pressure in health care and digital investments. For the remaining of fiscal 2023, the company expects quarterly non-allocated corporate costs to be on par with Q2 fiscal 2023 due to inflationary pressure in healthcare costs and incentive costs.
Zacks Rank & Key Picks
Jacobs currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks from the Zacks Business Services sector are:
SPX Technologies, Inc. (SPXC - Free Report) currently sports a Zacks Rank #1. SPXC has a trailing four-quarter earnings surprise of 28.4%, on average. Shares of the company have gained 52.2% in the past year.
The Zacks Consensus Estimate for SPXC’s 2023 sales and EPS indicates growth of 11.7% and 26.5%, respectively, from the year-ago reported levels.
SPS Commerce, Inc. (SPSC - Free Report) currently carries a Zacks Rank #2 (Buy). SPSC delivered a four-quarter average earnings surprise of 16.4%. The company’s shares have risen 51.6% in the past year.
The Zacks Consensus Estimate for SPSC’s 2023 sales and EPS indicates growth of 16.9% and 14%, respectively, from the prior-year reported figures.
Omnicom Group Inc. (OMC - Free Report) currently has a Zacks Rank #2. OMC came up with a four-quarter average earnings surprise of 9.1%. The stock has risen 20.6% in the past year.
The Zacks Consensus Estimate for OMC’s 2023 sales and EPS indicates growth of 3% and 6.9%, respectively, from the prior-year reported figures.