Jacobs Engineering Group Inc (NYSE:J). J has been benefiting from improved segmental performances, solid backlog, acquisitions and efforts to focus on high-value business.
So far this year, shares of Jacobs have gained 22.3% compared with the Zacks Engineering - R and D Services industry’s 23.7% rally. Although the stock’s gains slightly lagged the industry’s rally, earnings estimates for the fiscal third quarter, fourth quarter and full-year fiscal 2021 have moved up 2.1%, 2% and 5.2%, respectively, over the past 60 days.
Also, Jacobs’ earnings surpassed the Zacks Consensus Estimate in 12 of the trailing 14 quarters This trend signifies bullish analyst sentiments and justifies the company’s Zacks Rank #2 (Buy), indicating robust fundamentals and the expectation of outperformance in the near term. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Major Growth Drivers
Jacobs has an impressive earnings surprise history. The trend is expected to continue in the near term, courtesy of its solid first-half fiscal 2021 and fiscal 2020 results despite disruptions caused by the COVID-19 outbreak.
The company’s second-quarter fiscal 2021 revenues grew 3.5% and adjusted EBITDA increased 27% year over year. Net revenues (excluding pass-through revenues) also rose 6.7% year over year. Given the strong momentum, Jacobs lifted its adjusted EBITDA and EPS guidance during the fiscal second-quarter earnings call.
The company’s efficient project execution has been one of the main characteristics driving its performance over the past few quarters. The company’s ongoing contract wins are a testimony to the fact. During the fiscal second quarter, the company reported a backlog of $15.5 billion, up 9.6% year over year. This reflects consistent solid demand for Jacobs' consulting services.
Critical Mission Solutions (CMS) backlog grew 7% year over year and 6% on a pro-forma basis to $9.8 billion for the fiscal second quarter, which provided a strong visibility into the base business. People & Places Solutions (P&PS) backlog rose 9.6% year over year for the fiscal second quarter to $15.5 billion. The P&PS segment’s overall sales pipeline has expanded as both life sciences and electronics customers have moved forward with the previously paused projects.
During November 2020, Jacobs launched the Focus 2023 initiative, with expected benefits of more than $200 million versus fiscal 2020. Through this initiative, the company has been accelerating the adoption of digital technology across all facets of operations. This move will include a reduction in physical real estate footprint by more than 30% as it significantly shifts to a more flexible and virtual workforce.
Focus 2023 integration/transformation is expected to lead to $110 million of associated cash outflows in fiscal 2021. Also, this is expected to drive double-digit adjusted EBITDA growth in fiscal 2022. It can be said that several initiatives like this and the global need for infrastructural development have been a boon for Jacobs and companies like AECOM ACM, KBR (NYSE:KBR), Inc. KBR and Fluor Corporation (NYSE:FLR) FLR in the same industry.
Jacobs is reinforcing its business on the back of meaningful acquisitions and divestitures. In sync with this, on Mar 2, Jacobs acquired a 65% interest in PA Consulting — a U.K.-based leading innovation and transformation consulting firm — for $1.7 billion. The remaining 35% interest is held by PA Consulting employees.
PA Consulting will be treated as a consolidated subsidiary and a separate operating segment under U.S. GAAP accounting rules. It continues to expect 32-34 cents of adjusted EPS accretion from PA Consulting in fiscal 2021. In November 2020, Jacobs acquired a leader in advanced cyber and intelligence solutions -- The Buffalo Group. This strengthened its leading portfolio of national priority mission-focused, government solutions in the cyber domain and Intelligence Community.
In March 2020, a unit of Jacobs completed the acquisition of a nuclear consulting, remediation and program management business of John Wood Group, a U.K.-based energy services company. In fiscal 2019, Jacobs acquired KeyW, thereby enhancing the higher-margin CMS business through intelligence solutions capabilities in high-security clearance areas.
Furthermore, Jacobs’ superior return on equity (ROE) is indicative of its growth potential. The company’s ROE currently stands at 13.08%. This compares favorably with ROE of 6.3% for the industry it belongs to. This indicates efficiency in using its shareholders’ funds and ability to generate profit with minimum capital usage.
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