Jacobs Engineering Group Inc. (NYSE: J) is BUY. Jacobs, whose backlog is growing with high-margin orders, may also benefit from an eventual increase in U.S. We think Jacobs Engineering can continue to win new contracts even amid the coronavirus crisis. Our revised target price of $120 (up from $110) implies a projected FY21 P/E of 19.4, and a potential gain of 14% including the dividend.
On November 24, the company reported fiscal 4Q20 revenue and earnings that topped the consensus estimate. Reported revenue increased 3.7% to $3.5 billion. The higher revenue reflected approximately 5% sales growth in the People & Places Solutions segment. The gross margin fell to 18.9% from 19.6% and the operating margin dropped from 28.3% to 6.4%. Adjusted EPS increased to $1.63 from $1.48 a year earlier and handily topped the consensus forecast of $1.32. We had forecast EPS of $1.40. The positive earnings surprise reflected higher-than-anticipated revenue, share repurchases, and strength in the People & Places Solutions segment.
In the press release, Jacobs issued its FY21 EBITDA guidance of $1.055-$1.155 billion and provided its EPS estimate of $5.20-$6.00
For all of FY20, revenue rose to $13.6 billion from $12.7 billion and EPS rose to $5.48 from $5.05.
EARNINGS & GROWTH ANALYSIS
Recent segment trends and outlooks are provided below.
In People & Places Solutions, fiscal 4Q revenue increased approximately 5% to $2.2 billion.
In Critical Missions Solutions, revenue increased to $1.33 billion from $1.30 billion a year earlier, while operating income increased to $108 million from $88 million. The segment margin rose 130 basis points to 8.1%.
Overall, the backlog increased 6% to $23.8 billion, as Jacobs continued to increase its backlog.
Management is keeping a close eye on margins. The gross margin fell 70 basis points to 18.9% in 4Q20 from 19.6% in 4Q19. The operating margin fell to 6% from 28%.
The company scores well on debt leverage, as its long-term debt/cap ratio of 22.4% is below the average of 37.1% for peers in the construction and engineering industry. Its ROE of 16.7% is above the peer average of 8.5%, and its 6.4% adjusted operating margin is low relative to those of other industrial companies.
On March 25, 2020, Jacobs announced that it had borrowed $730 million and that a subsidiary had borrowed 250 million pounds with a maturity in March 2025. The interest rate on the borrowings will be LIBOR plus 0.875%-1.50%. The proceeds will be used to repay debt and to fund more profitable business segments, including environmental, security, space exploration and water.
MANAGEMENT & RISKS
Steven Demetriou became the company’s president and CEO in 2015, succeeding Craig Martin, who retired in late 2014. Prior to joining JU, Mr. Demetriou served for 14 years as chairman and CEO of Aleris Corp., a global aluminum producer. He also has business experience at a range of energy, chemicals, and mining companies.
Jacobs Engineering faces significant competition and is exposed to cyclical business conditions in the energy, mining, construction industries. It also generates about 20% of its revenue from U.S. government contracts, which are subject to spending cutbacks and may involve complex regulatory requirements. The international nature of its business also exposes J to currency risk.
Worldwide, a strong dollar and slumping commodity prices have lowered expectations for growth, particularly in emerging markets.
The company has approximately 52,000 employees. In FY19, it generated revenue of $12.7 billion.
The J shares are up 115% since our upgrade to BUY on June 3, 2016. On price/sales, they are trading at a multiple of 1.0, near the top of the five-year average range of 0.4-1.1. J’s multiples are generally in line with industry averages. Our revised target price of $120 assumes a multiple of 17.4-times our FY22 earnings estimate.
On November 25, BUY-rated J closed at $106.35, down $1.18.