Jacobs' Defense Contract - Analyst Blog

Jacobs Engineering Group Inc. (JEC) has won a $3.4 million one-year contract from the United States Army TACOM Life Cycle Management Command (LCMC) in Warren, Mich. The contract can be extended upto three years and is worth $10.6 million.

 

According to the contact, Jacobs will be offering support to the Program Manager Heavy Brigade Combat Team (PM HBCT) with its integrated logistics services, fielding services, new equipment training, total package fielding services, electronic and automation and other logistical services.

 

Jacobs' association with the U.S. defense might prove profitable because the government has proposed a 4% year-over-year increase in the U.S. defense budget during fiscal 2010 and 2.8% increase from 2010 level in fiscal 2011.

 

The gradual augmentation in the budget is expected to increase the inflow of contracts for Jacobs. New contract wins might help in improving 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 is its robust liquidity position with a net cash position of $847.6 million at the end of third quarter of fiscal 2010. Further, Jacobs' diversification across markets, geographical regions and services will help it to generate growth.

 

Jacobs' plans to expand into the emerging markets such as India, China and the Middle East, which are expected to perform much better than the developed markets in the coming years. Moreover, Jacobs' ongoing acquisition strategy will help it to emerge stronger.

 

However, 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 push Jacobs ahead in the future.

 

Thus, we reiterate our long-term Neutral recommendation on the stock. Currently, the stock retains its Zacks #3 Rank (short-term “Hold” rating).