Tetra Tech Eyes Oil Sands - Analyst Blog

Tetra Tech Inc. (TTEK) plans to acquire an engineering company, Fransen Engineering of Richmond, British Columbia. Employing about 180 people, Fransen provides engineering and technical support to industrial clients specializing in water treatment and tailings management for oil sands producers.

Revenue generated by Fransen in the past twelve months amounts to about $27 million. The acquisition will provide an opportunity for Tetra Tech to enter the oil sand market and provide expert knowledge in water, environmental, and industrial process.

Fransen, in turn, will benefit from Tetra Tech's available resources, which would enhance its present potential and help in meeting customer demand more effectively.

In October 2010, Tetra Tech acquired BPR of Quebec, specializing in process engineering. The current acquisition complements that of BPR. After completion of the acquisition, expected in the second quarter of fiscal 2011, Fransen will become a part of Tetra Tech's Engineering and Consulting Services (ECS) business segment.

The companies will not disclose the terms of the agreement. About 25% of Tetra Tech's business is generated from Canada and employs about 3,300 people in the country.

During the first nine months of fiscal 2010, Tetra Tech acquired three companies that enhanced its service offerings and expanded its geographic presence in the environmental consulting services and remediation and construction management reportable segments.

We expect the U.S. stimulus package to drive accelerating sales and profit growth over the next couple of years. The company's results are supported by its defensive growth profile, strong balance sheet, and the potential for further upside from stimulus spending and potential accretive acquisitions. Tetra Tech has executed well, despite Federal funding headwinds and state and local budget constraints.

However, demand for state and local government services is cyclical and vulnerable to economic downturns; if the economy weakens, then its revenues, profits and its financial condition may deteriorate. The company derives a majority of its revenue from government agencies, and any disruption in government funding or in its relationship with those agencies could adversely affect its business.

Headquartered in Pasadena, California, Tetra Tech Inc. was initially founded in 1966 as a provider of engineering services related to waterways, harbors and coastal areas. Over the past 40 years, the company has substantially increased the size and scope of its business and expanded its service offerings through a series of strategic acquisitions and internal growth.

Tetra Tech at present provides environmental services, water/wastewater management, infrastructure services, security design, and outsourced technical services.  The company currently operates 250 offices worldwide and employs about 10,000 people. Major competitors of Tetra Tech are Arcadis NV, Shaw Group Inc. (SHAW) and URS Corporation (URS).

We currently maintain our Neutral rating on Tetra Tech, with a Zacks #3 Rank (Hold recommendation) over the next one-to-three months.

 
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