Jacobs Engineering Stays Neutral - Analyst Blog
June 19 2012 - 1:00PM
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
business. 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 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 highly
pressurizing the services of the public sector. 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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