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Jacobs (JEC) Up 47% Year to Date: What's Driving the Stock?

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Jacobs Engineering Group Inc. has been riding on increased focus on high-value businesses and efficient project execution.

So far this year, shares of the company have gained 47.2% compared with the S&P 500 composite and its industry’s 14.3% and 8.8% respective growth. This outperformance can be primarily attributed to Jacobs’ impressive earnings surprise history and robust year-over-year performance. Notably, the company’s bottom line surpassed the Zacks Consensus Estimate in six of the trailing seven quarters.

Notably, estimates for fiscal 2019 and 2020 have increased 2.8% and 0.2%, respectively, over the past 30 days, reflecting analysts’ optimism surrounding its earnings growth potential.

A Look at Jacobs’ Q3 Earnings

Jacobs, which shares space with AECOM (ACM - Free Report) , KBR, Inc. (KBR - Free Report) and Altair Engineering Inc. (ALTR - Free Report) in the Zacks Engineering - R and D Services industry, posted stellar third-quarter fiscal 2019 results, wherein the top and bottom lines not only outpaced the consensus mark but also increased significantly on a year-over-year basis.

Adjusted earnings per share (EPS) in the quarter came in at $1.40, exceeding the consensus estimate by 12% and improving 12.9% from the year-ago period. The upside was driven by accelerated CH2M cost savings and prudent strategy execution.

Revenues of $3.17 billion surpassed the Zacks Consensus Estimate by 0.7% and increased 8% year over year. The improvement was mainly driven by healthy segmental businesses and the KeyW acquisition.

Let us delve deeper into the factors that make this Zacks Rank #3 (Hold) stock a profitable pick. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Steller Segmental Performance & Upbeat View: Not only Jacobs’ results exceeded analysts’ expectation in the first nine months of fiscal 2019, but also it registered stellar growth across the board. Adjusted earnings from continuing operations increased 31.6% year over year in the first nine months of fiscal 2019. Revenues during the period increased 23.2% from a year ago.

Adjusted operating income increased 29.4% and adjusted operating margin expanded 27 basis points (bps) from a year ago. Improved segmental performances, solid backlog, inorganic drive and greater focus on high-value business aided Jacobs to report solid results.

The company expects fiscal 2019 pro-forma EPS in the range of $4.75-$5.00, up from prior expectation of $4.45-$4.85. Also, it increased the lower end of its adjusted EBITDA guided range to $0.965-$1 billion from $0.92-$1 billion expected earlier. The company remains optimistic about future prospects on the back of solid segmental performance.

Strategic Buyouts: Jacobs has been transforming its existing portfolio with the addition of meaningful businesses and strategic divestures. In sync with this, on Aug 20, 2019, Jacobs announced that it has signed an agreement with U.K. energy services company, John Wood Group, to acquire the latter’s Nuclear business. The deal, which is expected to close by second-quarter fiscal 2020, will strengthen its position in highly profitable and complementary sectors within nuclear and defense. Markedly, it assumes $12 million of full run-rate cost synergies from the combined organizations.

Also, in April 2019, the company acquired KeyW to further enhance the higher-margin ATN/government services business through intelligence solutions capabilities in high-security clearance areas. On the contrary, in April 2019, Jacobs exited the Energy, Chemicals and Resources or ECR business, which tended to be more cyclical and less profitable.

Strong Backlog and Long-Term View: Its 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. This is evident from solid backlog numbers. As of Jun 28, 2019, backlog of $22.5 billion was up 8% from $19.8 billion reported in the comparable year-ago period. Of this backlog, ATN accounted for 37.8%, up 18.3%, and BIAF booked 62.2%, 10.4% up from the prior year.

For the next three years (through 2021), management has projected new margin targets as the company remains confident about the recent backlog trends. Jacobs aims at 125-175 bps expansion of adjusted operating margins in the long run. The updated guidance anticipates 100-150 bps increase in ATN margins and 110-140 bps growth in BIAF margin, supported by the elimination of ECR, which will lead to a 125-175 bps rise in overall margins.

This upbeat view is mainly attributable to a combination of higher-margin backlog, and its focus on generating efficiencies through digital and technological solutions. Markedly, the company is likely to generate 3-5% net organic revenue growth, with BIAF leading the way with 4-6% top-line compound annual growth rate (CAGR) and ATN with 2-3% CAGR. Notably, it expects more than 10% operating profit CAGR in the ATN business through 2021.

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