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Why Is Tetra (TTEK) Down 0.7% Since Last Earnings Report?

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It has been about a month since the last earnings report for Tetra Tech (TTEK - Free Report) . Shares have lost about 0.7% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Tetra due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Tetra Tech Tops Q2 Earnings Estimates, Ups FY19 View

Tetra Tech kept its earnings streak alive in the second quarter of fiscal 2019 (ended Mar 31, 2019), with earnings surpassing estimates by 9.4%. Also, the quarter’s adjusted net sales surpassed estimates by 6.7%.

The company’s adjusted earnings per share in the reported quarter were 70 cents, surpassing the Zacks Consensus Estimate of 64 cents. Also, the bottom line increased 29.6% from the year-ago quarter’s 54 cents on the back of strengthening businesses related to sustainable infrastructure, water and renewable energy.

Backlog Solid, Revenues Up Y/Y

In the reported quarter, Tetra Tech generated adjusted revenues of $727.4 million, reflecting year-over-year growth of 3.2%. Alternatively, adjusted net revenues (adjusted revenues minus subcontractor costs) were $590.1 million, reflecting growth of 10.8% from the year-ago quarter.

Further, the top line surpassed the Zacks Consensus Estimate of $553.3 million.

Backlog at the end of the quarter was $2,814 million, reflecting growth of 12% from the year-ago figure.

Based on customers, revenues from the U.S. Federal (accounted for 28% of the quarter’s revenues) were flat year over year or grew 9%, excluding adverse impacts of partial shutdown of the government. Conversely, the U.S. Commercial sales (24% of the quarter’s revenues) grew 5% year over year, and the U.S. State and Local sales (17% of the quarter’s revenues) increased 39%. International sales (31% of the quarter’s revenues) increased 23% on account of growth in infrastructure, and oil & gas programs.

The company reports revenues under the segments discussed below:

Net sales of Government Services Group were $316 million, up 8.8% year over year. This improvement was driven by healthy growth in disaster response and recovery planning as well as municipal water infrastructure businesses.

Revenues from Commercial / International Services Group totaled $274.1 million, reflecting year-over-year growth of 13.3%. Results were driven by healthy growth in oil & gas business in Canada, and the U.S. environmental business.

Margins Improve

In the reported quarter, Tetra Tech’s subcontractor costs totaled $137.2 million, reflecting a decline of 17.6% from the year-ago quarter. Other costs of revenues were $488.9 million, up 10.8% year over year. Selling, general and administrative expenses were $47.9 million, up 2.4% year over year.

Adjusted operating income in the reported quarter increased 20.8% year over year to $54.5 million while adjusted margin improved 70 basis points to 9.2%.

Balance Sheet and Cash Flow

Exiting the fiscal second quarter, Tetra Tech had cash and cash equivalents of $130.7 million, up 96.6% from $66.5 million recorded at the end of the last reported quarter. Long-term debt was down 6.6% sequentially at $231.3 million.

In the first half of fiscal 2019, the company generated net cash of $99.2 million from operating activities, significantly above $23.6 million generated in the year-ago comparable period. Capital expenditure was $7.2 million, up from $4.6 million in the first half of fiscal 2018.

During the first half, the company bought back shares worth $50 million and distributed dividends totaling $13.3 million. It had $175 million authorization left under the share buyback program at the end of the fiscal second quarter.

Outlook

Tetra Tech stands to gain from healthy demand for sustainable infrastructure, increased federal spending, municipal water infrastructure, disaster recovery planning and others. Also, the company noted that the acquisition of eGlobalTech is predicted to solidify its business from government and commercial customers. The company will integrate eGlobalTech with its Government Services Group.

For the fiscal third quarter (ending June 2019), net revenues are anticipated to be $575-$625 million and earnings per share are likely to be 75-80 cents.

For fiscal 2019 (ending September 2019), the company anticipates net revenues of $2.3-$2.4 billion versus the previously stated $2.2-$2.4 billion. Sales are projected to grow 5% (versus the earlier 2%) from the U.S. Federal, 5% from the U.S. Commercial, 15% (versus the earlier 10%) from the U.S. State and Local, and 10% from International customers.

Earnings per share for the year will likely be $2.95-$3.05, up from $2.80-$2.95 stated earlier. Effective tax rate in the year is anticipated to be 24%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates.

VGM Scores

At this time, Tetra has a great Growth Score of A, though it is lagging a lot on the Momentum Score front with a D. However, the stock was allocated a grade of A on the value side, putting it in the top quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Tetra has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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