Jacobs Stays Neutral - Analyst Blog
June 15 2012 - 7:00AM
Zacks
We recently reiterated our Neutral
recommendation on Jacobs Engineering Group Inc.
(JEC), a leading provider of professional, technical, and
construction services to industrial, commercial, and governmental
clients. The company’s mounting global coverage and diversified
portfolio have helped it attain a formidable position in the
infrastructure industry. However, judging by the degree of
uncertainty Jacobs still faces with regard to competitive pressure
and cyclical industry conditions; we believe it wise not to be too
optimistic about its future performance.
Jacobs, a dominant player in
engineering and construction business, is expected to be hugely
benefited from the constant development in the aviation, rail,
water, transit and telecom businesses. Additionally, the rapid
growth in oil, gas and mining industry is also likely to be a major
growth driver for the Company’s process, scientific and systems
consulting services.
The Company has been continuously
winning a contract galore from the federal governments and other
clients, expanded across services and geographies. In the second
quarter of fiscal 2012, Jacob confirmed receiving a bunch of
contracts from Tennessee Valley Authority, Civil Engineering and
Development Department of the Government of Hong Kong Special
Administrative Region etc. We anticipate that such constant inflow
of contracts and agreements will continue to bolster the company’s
growth going forward.
Jacobs’ flexible cost structure and
impressive track record of in-time project execution will help it
retain its long-term relationships with its core customers.
Additionally, the company’s transformation toward higher-margin
work, steady backlog and the strategy of better labor utilization
are likely to accelerate the company’s growth going forward.
However, the picture is not really
as clear as it appears as certain bottlenecks still continue to be
worrisome for the company. Jacobs’ business is highly dominated by
some core clients. Hence, there always remains a risk of shift in
loyalty or loss in client business due to alarming competition
prevailing in the industry. The company directly competes with its
peers; viz. Fluor Corporation (FLR),
Quanta Services, Inc. (PWR) and Adama
Technologies Corp. (ADAC).These companies may pose a huge
threat to Jacobs’ financial performance, affecting its
profitability.
The company’s increasing dependence
on third-party suppliers to get the supply of equipment and
resources may result in many serious issues such as deferred
project delivery, loss of goodwill or even order cancellation by
clients. This is because in the uncertain economic environment with
increasing cost, these third parties often face several
difficulties to get sufficient financing to help fund their
operations resulting in delay in its product supply.
Jacobs has been assisting a huge
number of federal government clients in UK, US and other nations.
However, the increasing budget constraints arising from current
fiscal adversities are putting the services of the public sector
under pressure. Consequently, a decline in government’s
infrastructure spending may impede the company’s profitability.
Jacobs needs to focus on battling these downsides better in order
to make the entire picture look more favorable.
Hence, owing to the risk-reward
zone the company continues to prevail in, we find it wise to
maintain a sideline stance for the time being. In the short run, we
have a Zacks #3 Rank on the stock which translates into a
short-term ‘Hold’ rating.
(ADAC): ETF Research Reports
FLUOR CORP-NEW (FLR): Free Stock Analysis Report
JACOBS ENGIN GR (JEC): Free Stock Analysis Report
QUANTA SERVICES (PWR): Free Stock Analysis Report
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