Tetra Tech Buys Fransen - Analyst Blog

Tetra Tech Inc (TTEK) is set to acquire substantially all of the assets of Fransen Engineering of Richmond, British Columbia.

The target company provides engineering and technical consultancy services to industrial clients with targeted expertise in water treatment and management for oil sands producers. Fransen's experience is complementary to the process engineering capability brought by BPR of Quebec, which Tetra Tech acquired in Oct 2010.

We expect the U.S. stimulus package to drive sales and profit growth over the next couple of years. TTEK should exceed expectations in 2010, given its defensive growth profile, strong balance sheet and potential for further upside from stimulus spending and potentially accretive acquisitions.

Federal bodies like The United States Agency for International Development (USAID), the Army Corps of Engineers and the Environmental Protection Agency (EPA) are all receiving significant increases in funding even without taking stimulus spending into account. Including stimulus funding, these departments and the Dept. of Defense are responsible for approximately 40.0% of TTEK's revenue.

In the most recent quarter, 18% of quarterly revenues were sourced from the U.S state and local bodies. Moreover, TTEK is set to experience a 25% funding increase in the current year.

Demand for state and local government services is cyclical and vulnerable to economic downturns. If the economy weakens, then the company's revenues, profits and financial condition may deteriorate. TTEK derives a majority of its revenue from government agencies. Any disruption in government funding or in its relationship with those agencies could adversely affect its business.

A significant shift in U.S. defense spending could harm its operations and reduce future revenues. Moreover, delay in the completion of the budget process for the U.S. government could postpone procurement of its services adversely impacting future revenues.

Tetra Tech Inc. is a leading provider of consulting, engineering, program management, construction and technical services focused on resource management and infrastructure. It provides cost-effective and innovative solutions to serve fundamental needs for water, environmental and alternative energy services.

It typically begins at the earliest stage of a project by applying science to problems and developing solutions tailored to clients' needs and resources. Its solutions may span the entire life cycle of the project and include applied science, research and technology, engineering, design, construction management, construction, operations and maintenance, and information technology. Shaw Group Inc. (SHW) and URS Corporation (URS) are major competitors.

We currently have a Neutral recommendation on Tetra Tech Inc.

 
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