Zacks_Analysts' Blog : JEC Retains Neutral Recommendation - Analyst Blog

We maintain a Neutral recommendation on Jacobs Engineering Group Inc. (JEC).

Jacobs distinguishes itself from its competitors through its focus on long-term relationships with its core clientele. It generates a significant portion of its revenue from repeat business, driven by customer preference for a reliable, low-cost provider with a track record of on-time project execution. We believe Jacob’s focus on smaller capital projects and engineering services will continue to help streamline the company’s capital spending budgets.

Jacobs has been winning strategic contracts from the federal governments and other clientele, diversified across services and geographies. We believe such continuous inflow of contracts and ongoing acquisition strategy will continue to boost its top line going forward. Moreover, the company’s steady backlog, controlled expenses and the strategy of better labor utilization are expected to accelerate growth and multiple expansions across segments.

Over time, Jacobshas been serving a huge number of federal government clients such as UK, US and other nations. Nonetheless, the federal government budget remains clouded by general spending uncertainty, viz. a prolonged slowdown in infrastructure spending or a termination of government funded projects at the federal, state, and/or local level.

This remains a matter of concern as project cancellation by a major client poses a major threat to the company’s financial performance while impacting its profitability. A deteriorating economic condition may also have an adverse impact on its business.

Mention may be made of third-party suppliers providing equipment and materials for completing Jacobs’ contracts. However, in the dwindling economic environment with rising cost, the third parties are also facing difficulty to obtain sufficient financing to help fund their operations. Under such a circumstance of supply interruption, the company may have to bear the negative consequences of delayed project delivery, loss of goodwill or even order cancellation by clients.

Hope survives as we witness Jacobs’ significant market share in the huge global infrastructure market. The company’s growing international exposure and diversification across markets, geographies and services have given it a competitive edge over its peers.

The company’s robust mining operation in South America and Australia, exposure in upstream oil and gas markets, and a strengthening US chemicals market would drive revenue growth, over the coming quarters. We believe a better market environment, improved pricing and a mix shift toward higher-margin work would boost the company’s future earnings.

Jacobs’ worldwide ever-increasing presence is thus a splendid indication of its strong growth trajectory in the infrastructure market across the globe. This has also been winning investor confidence over time and is expected to continue with such outlook in future. The company directly competes with its peers, viz. Fluor Corporation (FLR) and Foster Wheeler AG (FWLT). Jacobs has a Zacks #2 Rank, implying a short-term (1-3 months) Buy rating.