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Here's Why You Should Avoid Betting on Tetra Tech (TTEK)

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Tetra Tech Inc. (TTEK - Free Report) has appeared to have lost its sheen on difficult end-market conditions and other woes that are predicted to adversely impact its earnings.

The Zacks Rank #4 (Sell) company, which has a market capitalization of $4.4 billion, has also failed to impress investors with its recent share price movement. In the past three months, the company has lost 5.6% compared with the industry’s decline of 4.6%.

 


 

Let’s delve into the factors that might continue to take a toll on the firm.

Weak Demand Environment: In the quarters ahead, Tetra Tech anticipates to experience an adverse impact on its businesses associated with the U.S. commercial and international clients. Notably, the businesses are likely to be hurt on account of a weaker outlook for oil and gas capital expenditure, and the weakened demand environment, owing to the coronavirus-led market downturn.

Escalating Cost Issues: Tetra Tech has been experiencing rising costs over the past few quarters. For instance, its subcontractor costs and other cost of revenues (combined) increased 1.8% in the second quarter of fiscal 2020 (ended Mar 29, 2020) on a year-over-year basis. In addition, in the quarter, the company’s selling, general and administrative expenses expanded 4.3% year over year. We believe that unwarranted rise in costs and expenses might continue to prove detrimental to its financials in the quarters ahead.

Forex Woes & High Debt Level: Given its widespread presence in international markets, the company is exposed to the unfavorable foreign currency movements. It is worth mentioning that about 33% of its revenues were generated from international operations in the second quarter of fiscal 2020. As a matter of fact, in the fiscal second quarter, adverse foreign currency translation impact hurt the company’s revenues by $6 million and earnings by about 1 cent per share. In addition, at the end of the fiscal second quarter, its long-term debt was $333 million, reflecting growth of 3.3% on a sequential basis. Further, an increase in debt levels can raise the company’s financial obligations.

Estimate Trend: In the past 60 days, analysts have increasingly become bearish on the company, as evident from negative earnings estimate revisions. Notably, the Zacks Consensus Estimate for its fiscal 2020 earnings has trended down from $3.48 to $3.14 on four downward estimate revisions versus none upward. In addition, over the same timeframe, the consensus estimate for fiscal 2021 earnings has trended down from $3.80 to $3.32.

However, the company expects some of its businesses, associated with the U.S. Federal, and the U.S. state and local clients, to show resilience during the coronavirus-led global market downturn. This is on account of the higher federal government spending, and solid demand for its services related to water supply, wastewater treatment, watershed management and flood protection.

Stocks to Consider

Some better-ranked stocks are Activision Blizzard, Inc. , Broadwind Energy, Inc. (BWEN - Free Report) and Graphic Packaging Holding Company (GPK - Free Report) . While Activision Blizzard currently sports a Zacks Rank #1 (Strong Buy), Broadwind Energy and Graphic Packaging carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Activision Blizzard delivered a positive earnings surprise of 31.34%, on average, in the trailing four quarters.

Broadwind Energy delivered a positive earnings surprise of 50.00%, on average, in the trailing four quarters.

Graphic Packaging delivered a positive earnings surprise of 9.59%, on average, in the trailing four quarters.

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