Jacobs' Dual Contract - Analyst Blog

Jacobs Engineering Group Inc. (JEC) has recently won contracts, from the United States Army Corps of Engineers (USACE) and the Washington State Department of Transportation (WSDOT).

The former contract is of $12 million for a year with an option to extend it to another four years. As per the agreement, Jacobs will be providing total commissioning of medical and other facilities within the USACE. Jacobs will be supplying consulting services to the latter with regard to its highway system so as to enhance revenue and reduce blockage.

The contract value of the latter has not been disclosed but the duration of the contact is for three years with an option of indefinite extension.

Jacobs' diversification across markets, geographical regions and services will also help generate growth. Jacobs' plans to expand into the emerging markets of 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.

Jacobs' robust liquidity position with a net cash position of $847.6 million at the end of the third quarter of fiscal 2010 will hold good in future.

However, we maintain an Underperform recommendation on the stock based on Jacobs' continuous decrease in backlog since the beginning of fiscal 2010, which is expected to negatively affect its top-line results in fiscal 2011. Hence, we reduce our fiscal 2011 estimate.

The stock is cyclical in nature and thus, the sluggish economic environment, which has reduced the spending power of clients, was the prime reason for the decrease in backlog. Large investors fear to infuse capital in these unstable market conditions. Moreover, the company faces immense risk as it operates in a highly-competitive environment. The stock retains its Zacks #4 Rank (short-term Sell rating).