Tetra Tech's Strategic Restructuring & Buyouts Hold Promise

On Aug 30, we issued an updated research report on Tetra Tech, Inc. (NASDAQ:TTEK) .

Headquartered in Pasadena, Tetra Tech is a leading provider of consulting, construction management, engineering, program management and technical services. Presently, the company is shutting down its unprofitable businesses to focus on core growth areas in order to bolster growth. Some of the recent portfolio streamlining actions of the company include closing the Remediation & Construction Management business and incorporating portions of mining practices into other operations.

Tetra Tech’s long-term growth blueprint involves focusing on four growth markets –water, environment, infrastructure and energy. In short, it is investing in markets that are rapidly undergoing technological changes, witnessing adoption of new regulations and strong investments. Additionally, the company is pursuing strategic midstream activities instead of loss-making upstream activities to overcome the volatility in the oil & gas markets.

Moreover, the company’s acquisition pipeline looks promising. The buyout of Sydney-based consulting and engineering firm – Coffey International – and Virginia-based IT solutions firm – INDUS Corporation – are expected to act as key growth catalysts for Tetra Tech. While the Coffey acquisition has allowed Tetra Tech to obtain work across international development funding agencies like USAID, UKAID with a combined annual budget of over $90 billion, the INDUS Corporation buyout is proving to be conducive to smart-water services expansion.

In addition, Tetra Tech’s record high backlog level of $2.3 billion highlights the company’s underlying strength. Going forward, we believe that Tetra Tech’s solid backlog levels and robust pipeline with major government organizations like the U.S. Department of State, U.S. Army Corp. of Engineers and U.S. Air Force will continue to boost its growth.

Despite these positives, macroeconomic headwinds like currency fluctuations are proving to be major growth dampeners. The company derives a sizeable portion of its revenues from international businesses. Over the past few years, both domestic and international markets have suffered severely due to difficult economic conditions. The company’s business has been affected by federal decisions as well as political and macroeconomic conditions across major economies.

During third-quarter fiscal 2016, macroeconomic factors such as lower federal spending as well as volatility in oil & gas markets hurt the company’s results. Also, persistent weakness in mining operations is proving to be a significant challenge for Tetra Tech. Though the company’s diligent restructuring initiatives are expected to fuel long-term growth, they are likely to remain a drag for the short term.

Tetra Tech currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the sector include H2O Innovation Inc. HEOFF, Heritage-Crystal Clean, Inc., (NASDAQ:HCCI) and Landauer Inc. (NYSE:LDR) . While H2O Innovation sports a Zacks Rank #1 (Strong Buy), Heritage-Crystal Clean and Landauer carry a Zacks Rank #2 (Buy).

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