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Jacobs' (J) Stock Up 19% YTD: More Room to Run in 2021?

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Zacks Equity Research
·4 min read
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Jacobs Engineering Group Inc.’s J shares have gained 19.7% year to date (YTD), outperforming the industry’s increase of 5.6%. Segmental improvement, strong backlog, new acquisitions and technology-driven innovations continue to drive the company’s performance. Yet, coronavirus-related disturbances remain a concern.

Growth Drivers

Jacobs is benefiting from efficient project execution. Its ongoing contract wins are a testimony to the fact. Backlog at fiscal 2020-end was $23.8 billion, up 5.5% year over year (3% on a pro-forma basis). This reflects persistent solid demand for Jacobs' consulting services. CMS backlog grew 3% year over year on a pro-forma basis to $9.1 billion for fiscal 2020, which provided a strong visibility into the base business. The company’s overall 18-month qualified new business pipeline of $30 billion remains robust.

It has been focusing on acquisitions to drive growth. In March 2020, the company successfully acquired a nuclear consulting, remediation and program management business of John Wood Group, a U.K.-based energy services company. In November 2020, Jacobs acquired a front runner in advanced cyber and intelligence solutions - The Buffalo Group. The company is boosting the business by timely acquisitions and closing down its units. With the addition of KeyW and John Wood Group to its portfolio, Jacobs ensured the place of Tier-1 nuclear services provider. In November 2020, it launched the Focus 2023 initiative, with expected benefits of more than $200 million versus fiscal 2020. As a result of Focus 2023, the company has been speeding up the inclusion of digital technology all over its operations. Focus 2023 integration/transformation is expected to lead to $110 million of associated cash outflows in fiscal 2021. Additionally, this is likely to drive double-digit adjusted EBITDA growth in fiscal 2022.

Jacobs is benefiting from major government customers across the Department of Defense, Department of Energy, intelligence community and NASA. The company derived 33% of fiscal 2020 total revenues, directly or indirectly, from agencies of the U.S. federal government. Meanwhile, within its commercial markets (which made up 8% of CMS' fiscal 2020 revenues), the 5G wireless build-out continues to provide a robust opportunity.


Hurdles to Cross

In spite of adjusting with the changing business environment and social distancing protocols, Jacobs’ CMS revenues dropped 3.6% year over year for the fourth quarter of fiscal 2020. Although it expects the CMS segment to grow in fiscal 2021, the improvements will be more back half-oriented, given the impact from the two lower-margin contracts. In the P&PS segment, operating margin for the fiscal fourth quarter was down 210 basis points year over year, mainly due to COVID-related headwinds and some project closeout costs.

For fiscal 2020, 25% of the company’s customers were from outside the United Sates. Currency headwinds might hurt its earnings, going forward.

Zacks Rank & Key Picks

Jacobs currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the same space include Altair Engineering Inc. ALTR, Gates Industrial Corporation PLC GTES and Howmet Aerospace Inc. HW, each carrying a Zacks Rank #2 (Buy).

Altair Engineering, Gates Industrial and Howmet Aerospace’s earnings for 2021 are expected to increase 57.1%, 21.6% and 19.1% respectively.

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