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Tetra Tech (TTEK) to Gain From Strong End Markets Amid Risks

Zacks Equity Research

On Jan 20, we issued an updated research report on Tetra Tech, Inc. TTEK.

Over the past year, this Zacks Rank #3 (Hold) stock has gained 69.6% compared with the industry’s increase of 33.9%.

Existing Scenario

Tetra Tech remains bullish about its growth prospects across all four client sectors, namely, U.S. federal, U.S. state and local, the U.S. commercial and international. The company expects sales from the U.S. federal clients to increase 5-10% on growth in the U.S. federal budget for fiscal 2020 (ending September 2020). It anticipates sales from the U.S. commercial clients to grow 3-8%, benefiting from green building design and environmental services. Also, for fiscal 2020, the company expects the U.S. state and local sales to increase 10-15% on strengthening disaster recovering and municipal water infrastructure businesses. It projects International sales growth of 7-12%, driven by environmental and infrastructure programs. The company anticipates net revenues of $2.4-$2.6 billion for fiscal 2020.

Moreover, the company’s acquisition of WYG plc, (closed in July 2019) is predicted to enhance its global presence, especially in the U.K. and Europe, and business in environment, water and infrastructure markets. In addition, the eGlobalTech buyout (April 2019) has been strengthening its business from government and commercial customers. Further, over the past few quarters, the company has consistently returned significant cash to shareholders through dividends and share repurchases. During fiscal 2019 (ended September 2019), the company bought back shares worth $100 million and distributed dividends worth $29.7 million. Also, it announced a 25% hike in quarterly dividend rate in April 2019.

However, Tetra Tech has been experiencing rising costs over the past few quarters. For instance, the company’s subcontractor costs and other cost of revenues (combined) increased 14.6% in the fourth quarter of fiscal 2019 (ended September 2019) year over year. In addition, other costs of revenues increased 14.9% in the quarter, while selling, general and administrative expenses jumped 25.9%. Adjusted operating margin in the quarter declined 80 basis points year over year.

Further, international operations have exposed the company to the adverse impacts of macroeconomic cycles in the United States as well as forex woes. It is worth mentioning that approximately 32% of Tetra Tech’s revenues were generated from international operations in the fourth quarter of fiscal 2019.

Stocks to Consider

Some better-ranked stocks from Zacks Industrial Products sector are DXP Enterprises, Inc. DXPE, ABB Ltd ABB and Sharps Compliance Corp. SMED. While DXP Enterprises sports a Zacks Rank #1 (Strong Buy), ABB and Sharps Compliance carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

DXP Enterprises delivered positive earnings surprise of 17.67%, on average, in the trailing four reported quarters.

ABB pulled off positive earnings surprise of 2.89%, on average, in the previous four reported quarters.

Sharps Compliance’s earnings surprise in the last reported quarter was 100.00%.

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