Jacobs Upgraded to Neutral - Analyst Blog

We upgrade our recommendation on Jacobs Engineering Group Inc. (JEC) from Underperform to Neutral, based on the expectations of modest recovery in the company's business in the upcoming year after bottoming-out in fiscal 2010.

During fiscal 2010, Jacobs came across with the continuous decline in its backlog, especially in the sluggish economic environment, which reduced the client's spending power. Decrease in backlog in fiscal 2010 would have a negative impact on the top-line results of fiscal 2011. Hence, we maintain our fiscal 2011 and 2012 estimate at $2.55 and $2.85.

We believe gradual recovery in the economic conditions and Jacobs' diversification across markets; geographies and services along with a number of new contracts will help the company to perform better in future.

Jacobs has a successful record of more than 30 acquisitions over the last 20 years, which are expected to strengthen Jacobs' position in the infrastructure market in the future.  In fiscal 2010, Jacobs acquired Jordan, Jones and Goulding Inc. (JJG), a professional services firm. Recently, the company agreed to acquire some of the operations of Latin American based Aker Solutions ASA for $675 million.

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. Moreover, it will expand Jacobs' presence in the emerging markets,which are expected to perform much better than the developed markets in the coming years.

However, Jacobs faces immense risk as it operates in a highly competitive market.Jacobs direct competitors are Fluor Corporation (FLR) and Foster Wheeler AG (FWLT).The stock also currently retains its Zacks #3 Rank (short-term “Hold” rating).

 
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