Jacobs Expands in India - Analyst Blog

Recently, Jacobs Engineering Group Inc. (JEC) has received a second engineering contract from IOT Infrastructure & Energy Services Ltd. (IOT) (formerly Indian Oiltanking). Earlier it was for the Delayed Coker Unit (DCU) project to be erected at Indian Oil Corporation Ltd.'s (IOCL) Guwahati refinery, India. This time it is for the Cavern Project at the Indian Strategic Petroleum Reserves Limited (ISPRL) in Visakhapatnam, India.

The contract value has not been disclosed for both the transaction. However, the cost of the former was estimated at $60 million and the latter was estimated at $65 million.

Jacobs’ diversification into emerging markets such as India, China and the Middle East, will generate growth, as emerging markets are expected to perform much better than the developed markets in the coming years. Moreover, Jacobs’ ongoing acquisition strategy will also help it to emerge stronger.

Jacobs received a total of 12 contracts in the month of August 2010. This continuous inflow of contracts will definitely pull Jacobs out of the current sluggish environment.

New contract wins are also expected to improve backlog, which has been continuously shrinking since the beginning of fiscal 2010. During the first quarter of fiscal 2010, backlog reduced to $14.9 billion from $16.0 billion in the previous quarter. In the second quarter, it reduced to $14.7 billion, and finally in the third quarter to $13.5 billion.

Another positive factor for the company is its robust liquidity position with a net cash position of $847.6 million at the end of the third quarter of fiscal 2010.

Jacobs’ business is cyclical in nature due to a wide variety of uncontrollable factors, including economic conditions and changes in client spending, particularly during periods of economic uncertainty. However, the market is recovering gradually, which is expected to drive Jacobs ahead in the future.

Thus, we reiterate our long-term Neutral recommendation on the stock. Currently, the stock retains its short-term Hold rating, equivalent to a Zacks #3 Rank.