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Jacobs' Focus on Higher-Margin Line of Businesses Bodes Well

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Jacobs Engineering Group Inc. (JEC - Free Report) is poised to gain from healthy segmental businesses, accelerated CH2M cost savings along with strong operational execution. Meanwhile, increased focus on higher-margin line of businesses, namely Aerospace, Technology, Environmental and Nuclear (“ATEN”) and Buildings, Infrastructure and Advanced Facilities (“BIAF”), will help Jacobs to boost profitability in the coming quarters.

This construction and technical services company has outperformed its industry year to date. The outperformance is backed by an impressive earnings surprise history. The company surpassed earnings estimates in eight of the past 10 quarters and the trend is likely to continue in the near term as well, as is evident from strong fourth quarter of fiscal 2018 results.

Recently, Jacobs ended fiscal 2018 on a strong note. Adjusted earnings of the company came in at $4.47 per share, reflecting an increase of 38% year over year. Revenues were $15 billion during the year, increasing 49.5% from fiscal 2017. Moreover, adjusted operating margin expanded 60 basis points.


 

Key Growth Drivers

Jacobs is benefiting major government customers across the Department of Defense, Department of Energy, intelligence community and NASA. The company derived 23% of fiscal 2018 revenues, directly or indirectly, from agencies of the U.S. federal government. Meanwhile, within its commercial markets, the 5G wireless build-out continues to provide robust opportunities. Importantly, the company’s ATEN business is executing well and is positioned to deliver double-digit increase in profits on a year-over-year basis in fiscal 2019. These positives are likely to continue driving Jacobs’ bottom line in the upcoming quarters. Overall, the Zacks Consensus Estimate for the company’s earnings of $5.28 per share for fiscal 2019 reflects 18.1% year-over-year growth.

Revenues from the ATEN line of business (accounting for 31.4% of its total revenues) increased 100.3% year over year in the fiscal fourth quarter. This uptrend mainly stemmed from a number of long-term enterprise contract wins from the U.S. government, including the Missile Agency and Special Operations Command, which created a strong base of recurring revenues for the company. Backlog at the end of the quarter was roughly $8.86 billion for the segment, up 39.3% year over year.

Meanwhile, the company’s other higher-margin line of business, BIAF, also delivered stellar quarterly results. This business contributed 40.7% to its quarterly revenues and the top line advanced by a solid 67.6% as a result. A constant need to upgrade the living infrastructure, driven by major trends of urbanization and population growth, has created a robust pipeline of global opportunities for the BIAF segment.  

Jacobs is also reinforcing business on the back of meaningful business acquisitions. Its CH2M HILL Companies Ltd. (CH2M) buyout, completed last December, has been driving strong growth. Through the CH2M buyout, Jacobs foresees to accrue cost synergies worth nearly $175 million, even after Energy, Chemicals and Resources or ECR sale, on exiting fiscal 2019. Notably, in October 2018, the company agreed to offload its ECR business unit to Australia’s WorleyParsons Ltd., as it intends to focus more on highest-margin growth businesses.

Headwinds

Low-entry barriers in engineering, architectural, consulting and designing market segments have escalated threats of market rivalry for Jacobs. Also, the company intends to underpin its business through increased business internationalization. In fiscal 2018, approximately 36% of its revenues were earned from clients outside the United States. However, constant appreciation of the U.S. dollar, with respect to other major currencies, might continue to hurt its overseas market revenues as well as profitability. This is because a strengthening dollar raises the prices of the company’s construction services, subsequently rendering them less competent in markets with relatively lower exchange rates.

Zacks Rank & Key Picks

Currently, Jacobs carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Zacks Construction sector include KBR, Inc. (KBR - Free Report) , Altair Engineering Inc. (ALTR - Free Report) and EMCOR Group, Inc. (EME - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

KBR surpassed earnings estimates in three of the past four quarters, delivering average positive surprise of 12.6%.

Altair’s earnings are expected to grow 23.1% in 2018.

EMCOR’s earnings for the current year are expected to increase 20%.

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