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Jacobs Reaffirmed at Neutral

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We reaffirmed our long-term Neutral recommendation on Jacobs Engineering Group Inc. (JEC - Free Report) on May 15, 2013, as risk reward remains fairly balanced for the stock at this juncture.

Why the reiteration?

Jacobs’ earnings per share of 80 cents in fiscal second quarter of 2013, reported on Apr 30, missed the Zacks Consensus Estimate of 82 cents. However, Jacobs’ earnings improved 23.1% year over year.

Jacobs generated revenues of $2.83 billion in the fiscal quarter, an increase of 4.9%. The revenues missed the Zacks Consensus Estimate of $2.94 billion by 3.6%.

Since the announcement of the results, estimates have moved in either direction for fiscal 2013 and 2014. The current consensus estimate for fiscal 2013 rests at $3.30, a decrease of 1.0% over the last 30 days. For fiscal 2014, the current estimate decreased by a cent to $3.75 per share, over the same time frame.

In the coming quarters, growth in infrastructure, mining and minerals, refining, oil & gas and chemicals are expected to augment both earnings and revenue. Jacobs has also been successful in gaining the confidence of its customers, inducing them to trade again with the company, resulting in a high proportion of the business earned through repeat customers. Per the company, around 65% of the work obtained is through long-term relationship, which is illustrated in the 94% repeat business done in the fiscal second quarter of 2013. 

However, Jacobs’ dependence on third party suppliers is taken as a negative, since fund crisis among such dealers may even lead to discontinuation of their businesses. Under such circumstances, the company may fall prey to deferred project delivery, loss of goodwill or even order cancellation by clients due to the delay.

Also, Jacobs’ business operations outside the U.S. make the company prone to foreign currency risks and difficult economic and political scenario in the country of operations. 

Other Stocks to Consider

Jacobs currently carries a Zacks Rank #3 (Hold). Other stocks to watch out for in the construction industry are Michael Baker Corporation , carrying a Zacks Rank #1 (Strong Buy); while, Harris & Harris Group, Inc. and Quanta Services, Inc. (PWR - Free Report) , carry a Zacks Rank #2 (Buy).

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