- transportation infrastructure
- school construction
- energy efficiency in government buildings
- broadband internet access
- healthcare information technology
With the exception of the last two mentioned, it's thought that large engineering and construction firms like Jacobs, Fluor (NYSE:FLR) and Foster Wheeler (Nasdaq:FWLT) will benefit due to the broad range of services they provide. While the added business can't hurt, Jacobs will do fine without it.
Never Mind the Oil Sands
In November 2008, shares fell when it announced that a $2.36 billion Canadian oil sands project fell off its backlog list. The loss of the project dropped its year-over-year backlog increase from 40% down to 23%. Nonetheless, most analysts maintained a positive outlook on the stock. In early 2009, Jacobs began the year with a bang announcing several new projects demonstrating to investors that the falloff in the backlog in late 2008 wasn't fatal. The news, stoked speculation that further announcements are coming as the infrastructure-rebuilding program gets underway.
New contracts include a diesel supply project with Exxon Mobil (NYSE:XOM), design and construction services on a University of Oklahoma electricity and steam production plant, and construction management services for the San Francisco public utilities commission's drinking water pipeline project. The three projects alone will cost upwards of $300 million to complete.
Solid Financials
Jacob Engineering's last five years have been exceptional. Revenues grew from $4.6 billion in 2004 to $11.3 billion in 2008; net earnings from $115.6 million to $420.7 million; return on equity from 12.3% to 20.6% and the backlog in orders from $7.5 billion to $16.7 billion. Even net margins increased from 2.5% in 2004 to 3.7% this past year. Although it hopes to benefit from U.S. and U.K. infrastructure projects, these numbers lead me to believe they'll do fine with or without infrastructure contracts from president Obama. (Take a deeper look at a company's profitability with the help of profit-margin ratios in The Bottom Line On Margins.)
Highlights for fiscal 2008, ended September 30, include a 23% increase in backlog to $16.7 billion, net earnings increased 46.5% to $420.7 million and earnings per share (EPS) were up 43.8% to $3.38. Management sees another good year in 2009, providing initial full-year earnings guidance of $3.55 to $4.05.
Growth At a Reasonable Price
Jacobs return on equity might not be the highest in the technical services industry, but it's pretty darn close. Assuming Jacobs hits the top of its guidance at $4.05 in 2009; the forward P/E is around 12. The stock has dropped 48% in the past 52-weeks and this leads me to believe that the valuation metrics are more than fair at this time. (Find out how you can combine the best of both strategies to better understand the markets, see Blending Technical And Fundamental Analysis.)
In late December, Standpoint Research initiated coverage of Jacobs with a "buy" rating. Nonetheless, many feel it has some downside potential left in it. Its stock doubled the S&P 500 in the past five years. Time will tell, but I'm optimistic it can do it again.
