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Tetra (TTEK) Down 1.5% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Tetra Tech (TTEK - Free Report) . Shares have lost about 1.5% 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 drivers.

Tetra Tech Surpasses Q1 Earnings Estimates, Ups View

Tetra Tech reported better-than-expected results for the first quarter of fiscal 2020 (ended December 29, 2019), with earnings surpassing estimates by 9.1%.

The company’s adjusted earnings per share in the reported quarter were 84 cents, surpassing the Zacks Consensus Estimate of 77 cents. Also, its earnings grew 20% from the year-ago quarter’s 70 cents on sales growth and margin improvement.

Revenues & Segmental Performance

In the reported quarter, Tetra Tech generated adjusted revenues of $797.5 million, reflecting year-over-year growth of 11.4%. Alternatively, adjusted net revenues (adjusted revenues minus subcontractor costs) were $614 million, reflecting growth of 11.1% from the year-ago quarter.

Further, the company’s revenues surpassed the Zacks Consensus Estimate of $608.7 million by 0.9%.

Backlog at the end of the quarter was $3,165.8 million, reflecting growth of 13.3% from the year-ago figure.

Revenues from the U.S. Federal customers (accounting for 28% of the quarter’s revenues) rose 12% year over year on growth in environmental and water programs. Conversely, U.S. Commercial sales (24% of the quarter’s revenues) grew 5% year over year, driven by an increase in the U.S. renewable energy and environmental remediation businesses. Also, the U.S. State and Local sales (14% of the quarter’s revenues) decreased 7% due to weakness in disaster response business, partially offset by gain in the water infrastructure business. International sales (34% of the quarter’s revenues) improved 25% on growth in renewable energy and UK environmental businesses.

The company reports revenues under the segments discussed below:

Net sales of Government Services Group were $329.7 million, up 8.7% year over year. The improvement was driven by healthy growth in broad-based environmental and water programs, partially offset by a decline in disaster response business.

Revenues from Commercial / International Services Group totaled $284.3 million, reflecting year-over-year growth of 13.9%. Results were driven by healthy growth in environmental consulting in the U.K. and the strengthening of renewable energy sales in North America.

Operating Margin

In the reported quarter, Tetra Tech’s subcontractor costs totaled $183.6 million, reflecting growth of 11.9% from the year-ago quarter. Other costs of revenues were $504.3 million, up 10.9% year over year. Selling, general and administrative expenses were $46.4 million, up 8.1% year over year.

Adjusted operating income in the reported quarter grew 12.2% year over year to $62.5 million, while adjusted margin increased 10 basis points year over year to 10.2%.

Balance Sheet and Cash Flow

Exiting the fiscal first quarter, Tetra Tech had cash and cash equivalents of $110.8 million, down 8.2% from $120.7 million recorded at the end of the last reported quarter. Long-term debt was up 22.2% sequentially to $322.5 million.

In the fiscal first quarter, the company generated net cash of $18 million from operating activities, 17.8% above the prior-year quarter. Capital expenditure was $3.3 million, down 13.5% year over year.

During the quarter, the company bought back shares worth $21.2 million and distributed dividends totaling $8.2 million.

Outlook

For fiscal 2020 (ending September 2020), Tetra Tech anticipates sales from U.S. Federal clients to increase 5-10%, driven by growth in the U.S. Federal budget. It expects sales from U.S. Commercial clients to grow 3-8% on gains from sustainable buildings and environmental services.

Also, it anticipates U.S. State and Local sales to increase 10-15% on strengthening disaster recovery and municipal water infrastructure businesses. It expects International sales growth of 7-12%, driven by environmental and infrastructure programs.

For fiscal 2020, the company anticipates net revenues of $2.4-$2.6 billion, while adjusted earnings are predicted to be $3.40-$3.55, revised from $3.35-$3.55 per share mentioned earlier. For the fiscal year, it expects effective tax rate of 23%.

For the fiscal second quarter (ending March 2020), the company anticipates net revenues of $580-$630 million and earnings per share of 73-78 cents.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision.

VGM Scores

At this time, Tetra has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

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

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, 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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