Jacobs Engineering Misses - Analyst Blog

Jacobs Engineering Group Inc. (JEC) reported disappointing operating results for the first quarter of fiscal 2011 with both top-line and bottom-line results reporting below expectations.

During the first quarter, Jacobs reported EPS (excluding one-time items) of 56 cents, 6 cents below the year-ago level of 62 cents, and 3 cents below the Zacks Consensus Estimate of 59 cents. The above EPS excludes the one-time items of after-tax costs of $5.5 million, or 4 cents per share, related to due diligence costs incurred in support of its acquisition activities.

Net earnings and revenues were $71.3 million and $2,356.2 million respectively, reflecting decreases of 8.8% and 4.9% from $78.2 million and $2,477.8 million in the year-ago quarter. Revenues were marginally down from the Zacks Consensus Estimate of $2,369.0 million.

The decline was attributable to a not-so-significant recovery in the economic conditions and the decrease in the company's backlog in fiscal 2010, coupled with higher operating costs.

Revenues from Technical professional services increased to $1,204.8 million from $1,220.2 million in the first quarter of fiscal 2010 while revenues from Field services dropped 8.4% to $1,151.4 million.

Selling, general and administrative (SG&A) expense as a percentage of revenue rose by just 20 basis points to 9.7%. However, costs incurred for completing contracts, a prime cost for Jacobs, as a percentage of revenue remained stagnant at 85.9%. Thus, operating margin decreased 20 basis points to 4.4% from 4.6% in the year-ago quarter.

At the end of first quarter, backlog totaled $13.0 billion, down from $13.2 billion in the previous quarter and $14.9 billion at the end of the same period in the previous year. However, the company has maintained a high level of liquidity, with a net cash position of $957.3 million compared with $858.9 million at the end of the fourth quarter of fiscal 2010 and $940.9 million at the end of first quarter of fiscal 2010.

Outlook

Backed by the optimism on Aker Solutions ASA, Jacobs raised its fiscal 2011 EPS guidance range from $2.30-$2.80 to $2.40-$2.85.

In December 2010, Jacobs declared that will acquire some of the operations of Latin American based Aker Solutions ASA for $675 million. Aker Solutions ASA, through its subsidiaries and affiliates, is a leading global provider of engineering and construction services, technology products and integrated solutions. The transaction, which is expected to close by the second quarter of fiscal 2011, is also anticipated to be highly accretive to fiscal 2011 earnings.

The acquisition will also expand Jacobs' presence in the emerging markets, which are expected to perform much better than the developed markets in the coming years. Jacobs' diversification across markets, geographical regions and services will help it to generate growth.

Jacobs' ongoing acquisition strategy and robust liquidity position will help it to emerge stronger than its competitors like Fluor Corporation (FLR) and Foster Wheeler AG (FWLT).

However, Jacobs' continuous decrease in backlog since the beginning of fiscal 2010 is expected to negatively affect its top-line in fiscal 2011. Further, the stock is cyclical in nature; therefore the sluggish economic environment, which has reduced the spending power of clients, is the prime reason for the decrease in backlog. Investors fear infusing capital in these unstable market conditions.

The company also faces immense risk as it operates in a highly-competitive environment. Hence, we maintain our Neutral recommendation on the stock. The stock currently retains a Zacks #3 Rank (short-term Hold rating).

 
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