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Jacobs' Stock Up 56% in a Year: Can the Bull Run Continue?

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Shares of Jacobs Engineering Group Inc. J have rallied 56.4% in the past year, strongly outperforming its industry’s 30% growth. Moreover, the Zacks Consensus Estimate for the company’s fiscal 2020 earnings has been raised 1.2% over the past 30 days, reflecting analysts’ optimism on its solid earnings growth potential.

The upside can be attributable to the company’s focus on high-value businesses and efficient project execution. Meanwhile, its focus on transitioning from engineering and construction to a global technology-forward solutions company is expected to drive growth.

The company — which shares space with Quanta Services, Inc (PWR - Free Report) , KBR, Inc KBR and Altair Engineering Inc ALTR in the same industry — surpassed earnings estimates in 10 of the trailing 12 quarters.

However, higher transaction-related costs, stiff industry rivalry, and persistent headwinds in global energy and commodity markets remain concerning.

Let’s delve deeper and find out the factors that substantiate its Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth Strategies

Jacobs has been exhibiting strong results, courtesy of increased focus on new brands embracing innovation as connective foundation. Fiscal 2019 was a transformational year for the company. It divested the Energy, Chemicals and Resources (ECR) business in April, acquired KeyW in June, and announced the buyout of John Wood Group's Nuclear business in August. These moves were in sync with its focus on transitioning from an engineering and construction company to a global technology-forward solutions company.

Jacobs is reinforcing business on acquisitions. Overall, the company will likely see a robust pipeline of opportunities across all businesses as it has started to realize synergies from CH2M and KeyW buyouts.

Jacobs registered stellar growth in fiscal 2019. Adjusted earnings from continuing operations increased 30% year over year. Revenues grew 20.4% from a year ago. Adjusted operating margin expanded 50 basis points and adjusted EBITDA increased 21.6% from a year ago. Backlog at the end of fiscal 2019 was $22.57 billion, increasing 13.1% year over year. The solid backlog level is indicative of Jacobs’ strong growth opportunities that lie ahead.

In a nutshell, the company's focus on providing strong technical expertise to mission-critical sectors, serving the U.S. military warfighter and intelligence agencies, bodes well. Also, its focus on higher-growth and higher-margin sectors like telecom 5G, data analytics, cybersecurity and C5ISR provide significant growth opportunities.

Hurdles to Cross

Low-entry barriers in engineering, architectural, consulting and designing market segments have escalated market rivalry for Jacobs. Although the company intends to fortify the business through increased business internationalization, 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.

Meanwhile, higher costs involved in the transitioning process remain the biggest concern for the company. As of now, Jacobs incurred $153 million of more than $200 million ECR-related transaction separation and restructuring costs. For ECR, it expects to incur nearly all remaining costs by the end of the first half of fiscal 2020. It incurred $13 million of transaction fees and other one-time acquisition-related costs at the end of fiscal 2019.

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