JEC Retains Neutral Recommendation - Analyst Blog
January 13 2012 - 12:08PM
Zacks
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.
FLUOR CORP-NEW (FLR): Free Stock Analysis Report
FOSTER WHELR AG (FWLT): Free Stock Analysis Report
JACOBS ENGIN GR (JEC): Free Stock Analysis Report
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