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Transformed Portfolio to Aid Jacobs Amid Stiff Competition

Zacks Equity Research

Jacobs Engineering Group Inc. JEC has been benefiting from focus on high-value businesses and efficient project execution. Meanwhile, its strategic focus on transitioning from engineering and construction to a global technology-forward solutions company is expected to facilitate Jacobs to drive growth.

Shares of Jacobs have rallied 45.4% year to date, comfortably outperforming the Zacks Engineering - R and D Services industry’s 21.8% growth. Its price performance is backed by an impressive earnings surprise history. The company — which shares space with Quanta Services, Inc. PWR, KBR, Inc. KBR and Altair Engineering Inc. ALTR in the same industry — surpassed earnings estimates in 10 of the trailing 12 quarters.

Earnings estimates for fiscal 2020 have been upwardly revised over the past few weeks, suggesting that sentiments on Jacobs are moving in the right direction. Notably, earnings estimates for fiscal 2020 have increased 2.9% over the past 30 days, reflecting its solid potential.

However, higher transaction-related costs, stiff industry rivalry, and persistent headwinds in global energy and commodity markets remain concerns.

Let’s delve deeper and find out the factors that substantiate its Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Key Growth Drivers

Strong Performance and Solid Backlog: Jacobs has been exhibiting strong results and the trend is expected to continue in the near term, courtesy of increased focus on new brands embracing innovation as connective foundation. Fiscal 2019 was a transformational year for Jacobs. It completed the divestiture of the Energy, Chemicals and Resources or ECR business in April, acquisition of KeyW in June, and announced the buyout of Wood's nuclear business in August. These moves were in sync with its strategic focus on transitioning from engineering and construction to a global technology-forward solutions company.

Not only its results exceeded analysts’ expectations, but also Jacobs registered stellar growth in fiscal 2019. Adjusted earnings from continuing operations came in at $5.05 per share, reflecting an increase of 30% year over year. Revenues were $12.74 billion, increasing 20.4% from a year ago. Adjusted operating income increased 17% and adjusted operating margin expanded 50 basis points from a year ago. Adjusted EBITDA of $981.3 million increased 21.6% from a year ago. Overall, the company will see a robust pipeline of opportunities across all businesses, as it has started to realize synergies from CH2M and KeyW buyouts. Earnings estimates for the current year have increased 2.9% over the past 30 days, reflecting the stock's solid potential.

In a nutshell, the company's focus on providing strong technical expertise to mission-critical sectors serving the U.S. military warfighter and intelligence agencies bode well for growth and profitability. Also, its focus on higher growth and higher-margin sectors like telecom 5G, data analytics, cybersecurity and C5ISR provide significant opportunities for growth. Solid backlog level is indicative of Jacobs’ strong growth opportunities that lie ahead. Backlog at the end of fiscal 2019 was $22.57 billion, increasing 13.1% year over year. CMS backlog grew 18.7% year over year to $8.46 billion in fiscal 2019. Moreover, PPS backlog was up 10% year over year to $14.11 billion.

Inorganic Drive: Jacobs is reinforcing business on the back of meaningful business acquisitions. In sync with this, on Aug 20, 2019, the company announced that it has entered into an agreement to buy John Wood Group's Nuclear business for an enterprise value of approximately $300 million on a debt-free, cash-free basis. This transaction is expected to close by the end of second-quarter fiscal 2020. On Jun 12, 2019, Jacobs acquired KeyW. The transaction positioned Jacobs as a leader in high-value government services. Meanwhile, on Apr 26, the company completed the sale of the ECR business unit to Australia’s WorleyParsons Ltd., as it intends to focus more on highest-margin growth businesses.


Low-entry barriers in engineering, architectural, consulting and designing market segments have escalated threats of market rivalry for Jacobs. The company intends to underpin the business through increased business internationalization. However, constant appreciation of the U.S. dollar with respect to other major currencies such as Euro and Yen might continue to hurt its overseas market revenues, as well as profitability. In fiscal 2019, approximately 29% of its fiscal 2019 revenues were earned from clients outside the United States.

Meanwhile, stretched valuation is a concern. On a P/E (TTM) basis, Jacobs’ stock looks a bit overvalued than the industry, with respective tallies of 17.5x and 15.4x in the past year. Notably, the stock is currently trading higher than the median P/E (TTM) range.

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