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Jacobs (JEC) Benefits From Solid Backlog, Fx Woes Persist

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Impressive earnings performance, solid backlog as well as high-value business strategy bode well for Jacobs Engineering Group Inc. (JEC - Free Report) . However, currency headwinds and stiff industry competition are likely to pose risk for the company’s growth potential.

Shares of Jacobs have outperformed its industry in the past year. Moreover, the company surpassed the Zacks Consensus Estimate in each of the trailing four quarters, with average surprise of 12.4%.

Let’s delve deeper into the factors that bode well for this Zacks Rank #3 (Hold) company.

Major Growth Drivers

Jacobs has been performing pretty well of late, given ongoing contract wins along with its persistent focus on values, including safety, positive mental health, integrity, and leadership accountability. Also, its diverse portfolio and continuous innovation strengthen the prospects of the company. Jacobs secured several contracts from renowned institutions and public-sector agencies over the past year. The company believes that new contract wins will continue to boost its competency going forward.

Jacobs is benefiting from major government customers across the Department of Defense, Department of Energy, intelligence community and NASA. Importantly, Aerospace, Technology, Environmental and Nuclear or ATEN business, as well as Buildings, Infrastructure and Advanced Facilities or BIAF business are executing well. These are also positioned to deliver higher profits in fiscal 2019.

Its ATEN segment revenues grew 77.4% year over year in fiscal 2018. The uptrend was backed by volume growth across its legacy portfolio, increased spending by customers and additional revenues from CH2M acquisition. Moreover, backlog in the said segment was up 39.3% year over year at the end of fiscal 2018, primarily as a result of new contract wins from the U.S. federal government.

Also, revenues in its BIAF segment surged 61.5% from the prior-year period. The reported figure was mainly driven by favorable CH2M acquisition, contributing approximately $2.22 billion revenues. Notably, backlog of $11.38 billion was up 67.6% year over year as of Sep 28, 2018.

Jacobs is reinforcing business on the back of meaningful business acquisitions. In this context, the company has agreed to offload its ECR business unit to Australia’s WorleyParsons Ltd. in October 2018. Meanwhile, Jacobs foresees to accrue cost synergies worth nearly $175 million in fiscal 2019 on exiting synergies.

Pressing Concerns

Despite outperforming the industry, its shares have declined 13.1% in the past year owing to unfavorable foreign currency exchange rates. Jacobs aims to fortify business through increased business internationalization. In fiscal 2018, approximately 36% of its revenues were earned from clients outside the United States. Moreover, constant appreciation of the U.S. dollar with respect to other major currencies such as Euro and Yen might continue to hurt its overseas market revenues as well as profitability, as it enters into contracts that record their financials in currencies other than the U.S. dollar.

Additionally, low-entry barriers in engineering, architectural, consulting and designing market segments have escalated threats of market rivalry for Jacobs.

Stocks to Consider

Some better-ranked stocks in the Zacks Construction sector are 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, with the average positive surprise being 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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