$31.14
ALL NEW COMMENTS SINCE LAST UPDATE ARE HIGHLIGHTED
Overview
Headquartered at San Francisco, CA, URS Corporation (URS) is an engineering design services firm that executes large and complex engineering projects. The Company provides planning and design, systems engineering and technical assistance, program and construction management, and operations and maintenance services to local, state and federal government agencies, as well as private industry and foreign clients. Its expertise is focused on eight key markets: surface transportation, air transportation, rail transportation, industrial process, facilities and logistics support, water/wastewater treatment, hazardous waste management and military platforms support. URS provides its services through a network of offices and contract-specific job sites. In addition, the Company provides some of its services either as subcontractors or through joint ventures or other partnerships with other service providers. The company’s website is http://www.urscorp.com/
URS will begin to report its financial results on a calendar year end (Dec) as opposed to the current fiscal year ending October 31. On February 9, the company has filed a 10-Q with results for the two-month transition period (Nov. and Dec. 2004).
Positives / NegativesThe federal sector continues to have the highest level of near-term growth potential. So URS expects combined revenue from the federal sector to increase by 5-10% in F2005. / Despite signs of recovery in many regions, the state and local sector remains pressured by the slow, uneven improvement in state budget deficits and the further delay of a multi-year TEA-21 bill. Many of the states, that URS serves, have large budget deficits to overcome. Until that happens, the state and local sector will continue to be weak.
In the international sector, the company continues to see good opportunities in the environmental market as multinational clients are beginning to develop new facilities in Europe and Asia-pacific. / The private sector continues to be weak and continues to face challenges like pricing pressures, cost cutting and conservative spending by clients in many sectors.
In F2004, URS reduced debt by $271 million, as a result of which, the debt-to-capital ratio came down to 34% from 52% at the end of FY2003, thereby raising borrowing power and reducing interest burden. Analysts believe that free cash flow will be utilized for further balance sheet improvement. Management expects to repay an additional $80 million of debt in 2005 with internally generated cash flow. Apart from that, URS amended its credit facility, which reduced interest rates on borrowings and raised credit limits.
URS has won several contracts and the DoD and department of Homeland Security have increased their budgets. These factors are likely to increase demand for the company’s services.
Out of the brokers having active coverage on URS, 78% view the stock as a positive and the remaining 22% have a neutral view. None of the brokers gave a negative rating.
Sales
Our consensus model projects y-o-y sales growth of 6.5% and 6.9% during 2005 and 2006 respectively.
Sales summary as projected by the consensus model
Table 1 ($$ mm)
4Q04A / 2004A / 1Q05E / 2Q05E / 3Q05E / 4Q05E / 2005E / 2006ENet Sales / $907 / $3,382 / $852 / $915 / $929 / $904 / $3,601 / $3,848
Digest High / $908 / $3,382 / $884 / $940 / $962 / $976 / $3,609 / $3,900
Digest low / $907 / $3,382 / $810 / $898 / $901 / $850 / $3,593 / $3,799
Digest Average / $907 / $3,382 / $852 / $915 / $929 / $904 / $3,601 / $3,848
During F4Q04, total revenue was $907.4 million, up 8.3% y-o-y. The majority of the top-line growth came from the federal sector (URS and EG&G divisions) and international businesses, which were partially offset by continued weakness in the state/local and private sectors. Full year revenue grew 6.1% to $3.38 billion.
Federal (48% of total revenue)- The federal sector generated $442 million in revenue during the quarter and $1.62 billion for the fiscal year, which was up 19% and 16% y-o-y, respectively. Federal-sector projects for the URS division accounted for $492 million during the year, which increased 6% y-o-y. During the quarter, URS’s legacy business won new contracts, and experienced greater demand under existing contracts for environmental services and facilities management. EG&G revenue (all of which is from the federal sector) was $1.13 billion in FY 2004, up almost 22% on a y-o-y basis. About half of the growth is from the operational tempo in Iraq, which may start to wind down over the next couple of years. In general, the budgets for Department of Defense (DoD) and Department of Homeland Security (DHS) boosted nearly 90% of EG&G’s revenues. The company expects revenue from the federal sector to increase by 5-10% in FY2005.
State and Local (20% of total revenue)- Full year state and local revenues were flat with prior year levels at $686 million. For the quarter F4Q04, revenue in the sector increased 3% y-o-y to $205 million, partially due to new highway and air transportation projects. URS continues to successfully shift resources away from its weak surface transportation markets into more robust sectors, such as water/wastewater treatment, air transportation, and facilities, where funding is more stable or growing. The company believes that a renewed TEA-21 legislation bill will be passed in the first few months of 2005, and is expecting 3-7% revenue growth in 2005 from State and Local market, with most of the growth being back-end loaded toward the latter half of 2005.
Private (23% of the total revenue)- The private sector was weak for the year, as expected. Revenue for FY2004 of $762 million was down 10% y-o-y and, for the quarter 4Q04, was down 9% y-o-y. Strength from increased master service agreement (MSA) business (MSAs are long term, often multi-geography contracts, with multinational firms) was more than offset by continued low industrial capital spending and pricing pressures. Analysts believe that domestic industrial production is improving and capital investments in several sectors including manufacturing, chemicals and pharmaceutical are showing signs of improvement. This is expected to gain momentum in late 2005 and well into 2006. The company expects the Private sector market to start recovering in 2005 with revenues increasing by 0-5%, leading to a more favorable mix of business.
International (9% of the total revenue)- For the full year FY2004, International revenues were $315 million, up 19% over the previous year. Roughly 10% of the gain was due to foreign currency exchange fluctuation, with the remaining 9% driven by the strength in the European and Asia-Pacific businesses. For the fourth quarter of FY2004, International revenues grew 14% y-o-y to $80 million. The company expects revenues in the international sector to increase by 5%-10% in FY2005, net of currency translations.
Division wise consensus sales model
Table 2 ($$ mm)
2004A / 2005E / 2006E / '04 to '06 CAGRFY / FY / FY
URS / $2,255 / $2,382 / $2,571 / 6.8%
Year over Year Growth / -0.3% / 5.7% / 7.9%
EG&G / $1,129 / $1,223 / $1,295 / 7.1%
Year over Year Growth / 21.7% / 8.3% / 5.9%
Please see the separately saved spreadsheet for more details
Margin
Margin summary as projected by the consensus model
Table 3
Margins / 4Q04A / 2004A / 1Q05E / 2Q05E / 3Q05E / 4Q05E / 2005E / 2006EGross / 35.9% / 36.8% / 36.7% / 36.7% / 37.4% / 36.9% / 36.9% / 36.7%
Operating / 5.8% / 5.3% / 5.1% / 5.8% / 5.9% / 5.3% / 5.6% / 5.7%
Net / 2.9% / 2.1% / 2.3% / 2.8% / 2.9% / 2.5% / 2.6% / 2.8%
In F4Q04, gross margins of 35.9% declined 160 basis points y-o-y, and 90 bps sequentially. Overall company margins were impacted by the inherently lower margins for much of EG&G’s operating and maintenance work. In addition, the shift in mix toward more master service agreement work, which lessens cyclicality to a degree but has lower margins, along with the impact of heightened competition in a soft industrial sector, hurt results.
Consolidated operating margins fell 50 bps to 5.8% y-o-y in F4Q04, due to strength in the O&M market, which carries lower margins. In addition to that, operating margins were negatively affected by increasing healthcare costs, workers compensation, pensions benefits, and Sarbannes Oxley costs. The operating margins for the URS division in the quarter and year were 7.8% and 7.4%, respectively, which were both flat on a year-over-year basis. In the EG&G division, the operating margin in the quarter was 4.2% versus 5.3% in the year-ago quarter, due to an increasing mix of lower margin O&M work. For the year, the EG&G operating margin was 4.9% versus 5.2% in FY2003.
Analysts have different views regarding margin outlook for FY2005. Analyst (CSFB) believes that as the company approaches the second half of 2005, a number of catalysts will drive earnings including the signing of the TEA-21 bill, improving state and local budgets, and pick up in the private business. This is a higher margin business, which should lead to a more favorable mix of business. Analyst (Merrill Lynch) is of the view that mix shift toward the less profitable Federal business will pressure margins. EG&G delivers margins lower than the design and engineering business, and accounts for about half of Federal revenue. Further pressure will come from growth in operational tempo activity, which generates low single digit margins.
Division wise consensus operating profit/margin
Table 4 ($$ mm)
2004A / 2005E / 2006E / ’04 to ‘06CAGR
FY / FY / FY
URS / $167 / $169 / $186 / 5.4%
Margins / 7.4% / 7.1% / 7.2%
EG&G / $55 / $58 / $60 / 4.7%
Margins / 4.9% / 4.7% / 4.6%
Please see the separately saved spreadsheet for more details.
Earnings per Share
4Q2004A / 1Q2005E / 2Q2005E / 2005E / 2006EZacks Consensus / $0.45 / $2.13 / $2.39
Digest High / $0.59 / $0.46 / $0.60 / $2.20 / $2.45
Digest Low / $0.59 / $0.38 / $0.55 / $2.05 / $2.30
Digest Average / $0.59 / $0.44 / $0.57 / $2.11 / $2.38
Management EPS guidance / $2.10
Digest Average Y-o-Y Growth / 3.5% / 84.0% / 5.9% / 25.5% / 12.6%
In F4Q04, URS reported EPS of $0.59, a penny better than consensus. Outperformance was due to a lower than expected tax rate, lower interest expense and fewer shares outstanding partially offset by lower gross margins. For the full-year, the company earned $1.54 per share, $1.92 excluding the impact of $0.36 per share of one-time early debt redemption costs and $0.03 of net dilution from an offering completed in fiscal 2004, compared to $1.76 in fiscal 2003.
Analyst (CSFB) believes that the strength in the latter half of 2005 should continue well into 2006, and as such all markets will be on an upward trend. This will propel URS’s earnings to $2.40 a share in 2006, representing 15% growth from 2005 levels.
Analyst (Morgan Stanley) views management’s FY2005 guidance to be weaker on account of higher benefits and Sarbanes Oxley related costs. Stock option expensing could clip another 10-14% from 2005 EPS.
EPS Table
Table 5
Please see the separately saved spreadsheet for more details.
Target Price/Valuation
Target price of URS ranges from $30 to $45 with an average of $35.88.
Analyst with the highest price target (UBS) has given a positive rating on the stock and has based the target price on the two-stage discounted cash flow analysis.
Analyst with the lowest price target (Morgan Stanley) has a neutral rating on the stock and has based the target price on 14x CY2005E EPS of $2.10.
Analyst (Lehman Brothers) has based his target price of $35 on FY2006E EPS.
Please see the separately saved spreadsheet for more details.
Upcoming Events and Dates
The company is scheduled to have its earnings announcement on 9th May, 2005.
Long-Term Growth
The company has converted approximately 60% of its revenue to the new ERP system. Management expects to complete the conversion of total company revenue to ERP system by 2006. The ongoing implementation of the new ERP system may create some volatility in the cash flows over the next year.
The growth in backlog (up 4.4% y-o-y in F4Q04) suggests that revenue growth could accelerate over the next 12-18 months.
The general fund budgets for all 50 states are likely to be up 2.8% in F2005 as per the management. This is a good leading indicator for the health of the state budgets, but affects URS in a limited way. Analysts believe that a continued recovery in the overall economy as well as the passage of a multi-year TEA-21 reauthorization may help the business in the state and local sector to recover in mid-to-late 2005.
In the private sector, some end markets are showing signs of recovery, which lead to a longer-term positive outlook. Manufacturing and pharmaceutical are two sectors that are poised for recovery as investment in new projects is expected to begin in 2005.
The company has utilized the proceeds from its recent public offering and cash on hand to redeem debts making the debt-to-capital ratio 34%. Analysts expect URS to further strengthen its balance sheet by utilizing its free cash flow. Apart from that, the company amended its credit facility thereby reducing interest rates on borrowings and raising credit limits.
The estimated long-term EPS growth rate expected by analysts ranges from 10% (Merrill Lynch, Lehman Brothers) to 12.6% (Friedman).
Individual Analyst Opinions
POSITIVE RATINGS
Merrill Lynch – Stock is rated Buy with a target price of $37. The analyst expects all business segments to contribute to revenue growth in 2005, with mix shift causing some margin pressure. He also expects URS to use cash flow to pay down debt.