Jacobs Downgraded as Backlog Falls - Analyst Blog

We downgrade our recommendation on Jacobs Engineering Group Inc. (JEC) from Neutral to Underperform based on the company's continuous decrease in backlog since the beginning of fiscal 2010, which is expected to negatively affect its top-line results in fiscal 2011. 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.

The stock is cyclical in nature. Thus, the sluggish economic environment, which has reduced clients' spending power, was the prime reason for the decrease in backlog. Hence, we reduce our fiscal 2011 estimate by 3 cents. Large investors are afraid of infusing capital in these unstable market conditions.

Jacobs' industry is very much cyclical in nature and is subject to significant fluctuations due to a variety of uncontrollable factors, including economic conditions and changes in client spending, particularly during periods of economic uncertainty. A continuation or worsening of economic conditions or a reduction in government spending could have an adverse impact on the company's business, financial condition and results of operations.

Regardless of economic or market conditions, investment decisions by customers may vary on the basis of location or other factors like, availability of labor or relative construction cost. Moreover, Jacobs faces strong competition from some of its competitors like, Fluor Corporation (FLR) and Foster Wheeler AG (FWLT).

For 2010, EPS has been tapered to a range of $2.30 and $2.65 from $2.15-$2.65. The stock also currently retains its Zacks #4 Rank (short-term Sell rating).