Tetra Tech (TTEK): Inorganic Growth To Beat Macro Concerns?

We issued an updated research report on Tetra Tech, Inc. (NASDAQ:TTEK) on Jun 21.

Headquartered in Pasadena, Tetra Tech is a leading provider of consulting, construction management, engineering, program management and technical services. Presently, the company has prioritized four primary growth markets, namely, water, environment, and infrastructure and energy to unlock maximum growth. Also, selective investment in midstream strategies is expected to combat volatility associated with oil and gas markets.

We believe the company’s restructuring initiatives hold bright prospects. For instance, the recent winding down of Remediation and Construction Management will help in reducing operational risks and maximizing overall profits, thereby boosting the financials. The company’s strategy to move portions of mining practices into other operations to better align its environmental and infrastructure business is expected to help it tap into opportunities over the long haul.

In addition, the company’s strategic buyout drive has supplemented its core financials for long. Also, the recent acquisition of leading consulting and engineering firm Coffey International based has resulted in work across multiple international development funding agencies like USAID, UKAID and Australian Aid with a combined annual budget of over $90 billion.

Tetra Tech’s backlog level for ongoing operations rose a remarkable 18% year over year in the last reported quarter (which is an all-time high), driven by the backlog associated with the Coffey acquisition. Furthermore, the buyout of VA-based INDUS Corporation, an IT solutions firm, is expected to help Tetra Tech clinch federal contracts in the IT sector, thereby fortifying its foothold in the space.

Though the company’s long-term growth potential is immense, imminent headwinds include macroeconomic factors like lower federal spending as well as volatility in oil & gas markets. As the company derives a sizeable portion of its revenues from international businesses, currency fluctuations pose material risks to its profits. This apart, most of the company’s services including mining and oil & gas are highly cyclical and vulnerable to economic downturns, which in turn, weigh on its financials.

Over the past few years, both domestic and international markets have suffered severely due to difficult economic conditions. Also, given the fact that the company derives a major portion of its revenues from the U.S. federal, and state and local government agencies, it is vulnerable to unfavorable shift in the U.S. defense spending. A host of risks associated with government contracts include instances of delay or cancellations, reduction in government contracting firms and changing political priorities.

Tetra Tech currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include Landauer Inc. (NYSE:LDR) , MagneGas Corporation (NASDAQ:MNGA) and Willdan Group, Inc. (NASDAQ:WLDN) . While Landauer sports a Zacks Rank #1 (Strong Buy), MagneGas Corporation and Willdan Group carry a Zacks Rank #2 (Buy).