Note: This report contains substantially new material. Subsequent reports will have changes highlighted.
Reason for Report: Fiscal 1Q18 Earnings Update
Prev. Ed.: Jan 31, 2018; Fiscal 4Q17 Earnings Update
Brokers’ Recommendations: Neutral: 63.6% (7 firms); Positive: 36.4% (4); Negative: 0% Prev. Ed.: 7; 4; 0
Brokers’ Target Price: $72.44 (↑ $5.11 from the last edition; 9 firms) Brokers’ Avg. Expected Return: 18.9%
Note: A Flash Update was done on Feb 7, 2018 (Fiscal 1Q18 Earnings Release)
Portfolio Manager Executive Summary
Jacobs Engineering Group Inc. (JEC or the company) is one of the world's largest engineering and construction companies providing services to a variety of industrial, commercial and government clients in the global forum.
Of the 11 firms covering the stock, 7 firms provided neutral outlook and 4 provided positive ratings. Target prices provided by the firms range from $61.00 to $78.00 with an average of $72.44.
Neutral or equivalent outlook (7/11 firms or 63.6%): These firms expect Jacobs’ bottom line to grow on the back of increased global construction activities and initiatives to increase its operational efficiency. Moreover, the company is expected to benefit from various acquisition deals. However, they also recognize that market uncertainties such as unfavorable input price changes, currency fluctuations; weakening energy resource prices or market share loss might weigh on Jacobs in the near future.
Buy or equivalent outlook (4/11 firms or 36.4%): These firms are optimistic about Jacobs’ bright prospects, based on increasing global construction activities. These firms also believe that the company is well positioned to gain market share supported by the relatively stable customer relationship-based model that focuses on a long-term share gain.
Mar 16, 2018
Overview
Based in Pasadena, CA, Jacobs Engineering Group provides engineering and other services related to design and construction of major facilities, plants, infrastructure and other projects. The company has established its expertise in a variety of projects, including process plants, industrial and commercial buildings, infrastructure projects and manufacturing plants. It designs and engineers process plants, including chemicals and polymers, pharmaceuticals and biotechnology, oil and gas, refining, food and consumer products, and basic resources industries; buildings, including hospitals, and education; infrastructure projects, including highways, roads, bridges, and other transportation systems; pulp and paper plants; and other facilities.
Analysts have identified the following factors for evaluating the investment merits of Jacobs:
Key Positive Arguments / Key Negative ArgumentsGreater degree of industrialization in the current economic scenario has increased construction activities. This, in turn, is indirectly increasing the demand for Jacobs’ services. / Jacobs’ growth is highly dependent on the cyclical nature of the global construction industry. The macroeconomic conditions and market prices of core products such as crude oil affect the company’s financial fundamentals. Revenue and margin growth are considerably influenced by investments made by consumers. In cases of economic weakness like recession global customers’ spending power declines, and, in turn, weighs on Jacobs’ financials.
Jacobs has a high brand value in the global construction and engineering market on the back of its unique product and process-based technologies. / Jacobs faces stiff competition within the industry which often leads to loss of market share as well as profitable business contracts. Intense competition also limits the company’s bidding power in large business projects.
Jacobs, with a wide global network of branches, focuses on expanding its trade in the long run through tactical organic and inorganic growth plans. Notably, the company also has a highly skilled workforce. / Jacobs accrues a large proportion of its revenues from orders provided by the public sector authorities of different countries such as the Federal Government. A sudden unfavorable change in the budgetary plans of these authorities might significantly hurt the company’s aggregate revenues. For instance, the latest Brexit vote has raised uncertainty for Jacobs’ U.K.’s nuclear build sector trade.
Jacobs has been undertaking diligent restructuring moves for boosting its profitability and making its operations more efficient in the near term. In sync with this, the company has planned to restructure its business in terms of three operating segments from second-half of fiscal 2018 (after integrating CH2M within its business). / Weak pricing conditions prevailing in the energy sector are adversely affecting Jacobs’ business. Investments made in these sectors are currently low; hence reducing the company’s contract winning opportunities.
Jacobs derives revenues from four global lines of business: Buildings & Infrastructure, Industrial, Aerospace & Technology and Petroleum & Chemicals.
Petroleum & Chemicals: The segment offers integrated delivery of projects of Petrochemicals, Oil & Gas and Refining. The segment bridges the company’s upstream, downstream and midstream industries with construction, maintenance, project management, consulting, procurement and engineering services.
Buildings & Infrastructure: The segment offers competent aviation, transit, mission critical, built environment and civil construction projects in the global forum.
Aerospace and Technology: The segment offers in-depth varieties of engineering, construction, nuclear, scientific and technical support services to the aerospace, defense, automotive and technical industries across various countries.
Industrial: The segment provides procurement, project management, engineering, construction, and on-site repairing services to global clients belonging to the domains of Field Services, Specialty Chemicals & Manufacturing, Mining & Minerals and Life Sciences markets.
On Dec 18, 2017, Jacobs announced that from the second half of fiscal 2018, the company will report results in three global lines of businesses — Aerospace, Technology, Environmental and Nuclear (ATEN), Energy, Chemicals and Resources (ECR), and Buildings, Infrastructure and Advanced Facilities (BIAF).
The company has planned to restructure its operations to integrate CH2M HILL Companies Ltd. (CH2M) within its existing business. Jacobs acquired the company in December 2017.
Further information on the company can be found at its website: www.jacobs.com
Note: The company’s fiscal year ends in September; fiscal references differ from the calendar year.
Mar 16, 2018
Long-Term Growth
Increasing degree of industrialization and higher demand for construction activities are both boosting demand for Jacobs’ premium services over time.
Jacobs’ relationship-based business model distinguishes it from peers. The company derives a significant portion of its revenues from repeat business, driven by customers’ preference for a reliable, low-cost provider with a proven track record of successful project execution.
Many brokerage firms perceive that the company’s newly revised fundamental growth strategy would be highly productive and help in enhancing return on capital. It would be beneficial for its shareholders in the long term. Moreover, the company continues to implement new share repurchase strategies. At the same time, it undertakes expense-reduction initiatives to protect shareholders from cost overruns.
Jacobs also boasts a robust fundamental franchisee and strong backlog. Supported by these essentialities, the company can concentrate on funding smaller business projects in the near future, at a time when capital expenditure will be reduced due to macroeconomic uncertainties.
With lower debt levels and high liquidity, Jacobs maintains a sturdy balance sheet. In the long run, the company aims to further strengthen its financials by adopting certain cost-reduction strategies in its business.
Going forward, the company’s international expansion, upstream development and public infrastructure work are projected to drive steady growth over the next several years. Also, the company’s metals and mining, and oil and gas business are expected to flourish. In addition, the broader market exposures, long-term acquisition strategy and low-risk pricing approach will likely benefit the revised capital-spending budgets in the long term.
Mar 16, 2018
Target Price/Valuation
Provided below is a summary of target price/valuation as compiled by Zacks Digest:
Rating DistributionPositive / 36.4% ↔
Neutral / 63.6% ↔
Negative / 0.0% ↔
Avg. Target Price / $72.44 ↑
Digest High / $78.00 ↑
Digest Low / $61.00 ↑
Analysts with Target Price/Total / 9/11
Key risks that can impede achievement of the target price are lower bookings and the company’s huge dependence on third parties for completing its contracts. The cyclical nature of its business is also a matter of concern as market recovery remains slow.
Recent Events
On Mar 16, 2018, Jacobs paid a regular quarterly dividend of 15 cents per share to shareholders of record as on Feb 16.
On Mar 14, 2018, Jacobs won a $778-million global information technology (IT) maintenance and operations contract from the U.S. Special Operations Command. The project will likely be accomplished by 2023. At the time of completion, Jacobs will be providing various types of IT assistance for the Special Operations Forces Information Environment.
On Feb 28, 2018, Jacobs received a contract from Highways England to evolve feasible solutions required to enhance the transport network around highways north west of Manchester. Apart from this, the company might also have to offer specialized modelling analytics and product management services under the contract.
On Feb 19, 2018, Jacobs inked a non-exclusive contract with Atos, in a bid to offer state-of-the-art predictive, condition-based field service optimization and maintenance solutions. These solutions will be provided across various end-markets such as energy, water, transport, nuclear and aviation.
On Feb 13, 2018, Jacobs secured a new feasibility study contract from Borealis AG, for the development of the latter’s Belgium polypropylene plants. The new deal will not only make Borealis the leading polypropylene supplier in Europe but would also fortify Jacobs’ chemical business in the continent.
On Feb 7, 2018, Jacobs reported fiscal 1Q18 results. Highlights are as follows:
· Revenues came in at $2,750.3 million, up 7.8% year over year.
· Adjusted earnings were 77 cents per share, up 13.2% from the year-ago tally.
On Feb 6, 2018, Jacobs secured a five-year agreement renewal from Shell Canada Limited, for providing turnaround and mechanical maintenance services on Shell’s Scotford location, in Fort Saskatchewan, Alberta, Canada.
On Jan 31, 2018, Jacobs won a new contract from Manchester Airport Group, for providing maintenance and construction services for the latter’s East Midlands Airport in the U.K. The construction related activities of the project is anticipated to be accomplished by 2020, but has extension options up to 2025.
On Jan 25, 2018, Jacobs secured a three-year contract from Anglo American for an undisclosed amount. As per the deal, the company would be offering its premium field technical assistance and engineering services in the latter’s Los Bronces copper mine.
On Jan 17, 2018, Jacobs secured a new contract from the energy business arm of Carcross/Tagish First Nation (C/TFN) — Carcross/Tagish Energy Corporation (C/TEC) — for an undisclosed amount. As per this three-year deal, the company will provide its premium technical consultation and engineering services for the various projects and business initiatives undertaken by C/TEC in Northern British Columbia and the Traditional Territories of Southern Yukon.
On Jan 16, 2018, Jacobs won a new engineering service contract from BHP Billiton. Per the deal, the company will provide its state-of-the-art services in BHP Billiton’s new nickel sulphate plant located at the Kwinana Nickel Refinery in Western Australia.
On Jan 10, 2018, Jacobs secured a three-year engineering, procurement and construction management services contract from BP plc. Per the deal, the company will offer its premium services for the Phase 2 of the prestigious Khazzan Tight Gas Project.
On Jan 9, 2018, Jacobs’ joint-venture business with Aurecon has secured a new engineering design services contract for Melbourne’s West Gate Tunnel Project. The design calls for construction of two new tunnels (each comprising three lanes), broadening the West Gate Freeway (from eight to 12 lanes), and new and upgraded walking and cycling paths (14-kilometers long).
On Jan 4, 2018, Jacobs secured a contract from Pfizer Inc. for providing engineering, procurement and construction management services in latter’s latest gene therapy manufacturing plant, located in Sanford, North Carolina. The company will also provide commissioning, designing and expediting services for the venture.
On Jan 3, 2018, Jacobs secured a contract from Borealis AG for an undisclosed amount. Per the deal, the company has been selected for the front-end engineering design (FEED) phase for the latter's propane dehydrogenation (PDH) plant, located in Kallo, Belgium.
Revenues
Revenues in the fiscal 1Q18 were up 7.8% year over year to $2,750.3 million. The top line also exceeded the Zacks Consensus Estimate of 2,563 million.
Stronger Aerospace & Technology and Buildings & Infrastructure segments performance supported this upswing.
Segment Details
Revenues of Petroleum & Chemicals segment were $621 million, down 3.2% year over year.
Aerospace & Technology segment’s quarterly sales improved 25% year over year to $721.5 million.
Buildings & Infrastructure segments’ sales increased 13.4% to $658.5 million, on a year-over-year basis.
Industrial segment revenues edged down 0.3% year over year to $749.3 million.
At the end of the reported quarter, the company’s backlog came in at a record high of $26.2 billion.
Outlook
Jacobs intends to boost its near-term revenues on the back of a diversified business structure.
The company believes new organic investments, bolt-on acquisitions, superior customer relationships and sturdier demand for state-of-the-art technology solutions will bolster revenues of its Aerospace & Technology line of business (LOB) in the quarters ahead. Also, increased defense spending in major economies such as Australia, the United States and the U.K. are expected to strengthen this segment’s sales.
Moreover, Jacobs expects that increasing public investments in worldwide transportation, resilience and water infrastructure will improve top-line performance of its Buildings & Infrastructure LOB. Also, new business scopes in the healthcare market of some countries and business opportunities from the Asia Pacific end-markets are also expected to drive the segment’s revenues in the upcoming quarters.
Jacobs believes that revenues of its Industrial LOB would become stronger in the upcoming quarters on the back of improved life science business. Increased spending of biopharmaceutical majors and greater regulatory approvals secured for next-generation therapies are expected to underpin Jacobs’ life science business in the near term. Also, sturdier semiconductor and mining & minerals businesses are expected to drive the top-line results of the company’s Industrial business.