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Jacobs' Buyouts and Focus on High-Margin Business Bode Well

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Jacobs Engineering Group Inc. (JEC - Free Report) has been riding high on increased focus on high-value businesses and efficient project execution. Shares of this construction and technical services provider have rallied 34.5% year to date, comfortably outperforming the Zacks Engineering - R and D Services industry’s 23.4% collective growth. The price performance is backed by Jacobs’ impressive earnings surprise history. Notably, the company surpassed earnings estimates in six of the trailing seven quarters.

Earnings estimates for fiscal 2019 and 2020 have been upwardly revised over the past few weeks, suggesting that sentiments on Jacobs are moving in the right direction. Notably, earnings estimates for fiscal 2019 and 2020 have increased 0.4% and 0.4%, respectively, over the past seven days.

Let’s delve deeper into the factors that bode well for this Zacks Rank #3 (Hold) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Key Growth Drivers

Not only Jacobs’ results exceeded analysts’ expectation, but also it registered stellar growth in the first six months of fiscal 2019. Adjusted earnings from continuing operations came in at $2.18 per share, reflecting an increase of 47.3% year over year. Revenues were $6.2 billion during the period, increasing 32.7% from a year ago. Adjusted operating income increased 50% and adjusted operating margin expanded 89 basis points over a year. Improved segmental performances, solid backlog, its inorganic drive and greater focus on high-value business aided Jacobs to report solid results. Higher-margin line of businesses — Aerospace, Technology and Nuclear (“ATN”) and Buildings, Infrastructure and Advanced Facilities (“BIAF”) — continue to see a robust pipeline of government and infrastructure-spending programs.

Meanwhile, Jacobs has been transforming its portfolio with meaningful business acquisitions and divestitures. In sync with this, Jacobs announced a definitive agreement in April 2019 to acquire KeyW, thereby enhancing higher-margin ATN/government services business through intelligence solutions capabilities in high-security clearance areas. KeyW, which provides engineering/technology solutions in intelligence, cyber and related national security concerned areas for the U.S. government, will compliment Jacobs' ATN segment. The transaction is expected to be completed by Aug 31, 2019.

Again, the acquisition of CH2M HILL Companies Ltd. (CH2M) in December 2017 strengthened the company’s global water business. Also, its CH2M buyout fortified businesses across the industrial sector. On the contrary, Jacobs exited Energy, Chemicals and Resources or ECR business, which tended to be more cyclical and less profitable, in April 2019.

In a nutshell, the company's focus on infrastructure, aerospace, cybersecurity and technical building projects bodes well for growth and profitability. The company’s focus on long-term mission-critical enterprise contracts also bodes well. It has a robust pipeline of more than $30 billion through 2020. These positives are likely to continue driving Jacobs’ bottom line in the upcoming quarters.

Efficient project execution has been one of the main characteristics driving Jacobs’ performance over the last few quarters. The company’s ongoing contract wins are a testimony to the fact. Backlog at the end of the fiscal second quarter was $20.7 billion, increasing 7.5% year over year.


Low-entry barriers in engineering, architectural, consulting and designing market segments have escalated threats of market rivalry for Jacobs. The company intends to underpin its business through increased business internationalization. In fiscal 2018, approximately 36% of revenues were earned from clients outside the United States.

Meanwhile, higher costs related to the company’s portfolio restructuring initiatives raise concerns. Notably, as of second-quarter fiscal 2019, Jacobs incurred approximately $250 million costs, versus $265 million expectation, to achieve CH2M synergies. For ECR, the company now expects $200 million of one-time ECR-related transaction, separation and restructuring costs. Via the KeyW acquisition, Jacobs expects to achieve $15 million of run rate cost synergies by the end of fiscal 2020, with approximately $25 million of costs to achieve those synergies. Additionally, it expects approximately $16 million of transaction fees and other one-time acquisition-related costs.

Key Picks

Some better-ranked stocks from the Zacks Construction sector include EMCOR Group, Inc. (EME - Free Report) , MasTec, Inc. (MTZ - Free Report) and Quanta Services, Inc. (PWR - Free Report) . While EMCOR sports a Zacks Rank #1 (Strong Buy), the other two stocks carry a Zacks Rank #2 (Buy).

EMCOR’s earnings per share are expected to increase 11% in 2019.

MasTec’s 2019 earnings per share are expected to increase 15.7%.

Quanta Services has an expected earnings growth rate of 25.3% for 2019.

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