Our latest featured stock, a mid-cap provider of technical, professional and construction services, has been restructuring its operations for several years and continues to face both macroeconomic pressures and weakness in important end markets, observes analyst John Eade of Argus Research.
Despite these pressures, we are raising our rating on Jacobs Engineering Group (JEC) from a hold to a buy rating. We are beginning to see progress in this mid-cap company’s long-running turnaround and are attracted by its solid balance sheet and current valuations.
JEC shares have outperformed over the past quarter, rising 24%, while the S&P 500 has gained 5%. The shares have also outperformed over the past year, with a gain of 17% compared to a flat performance for the index. The beta on JEC is 1.38.
Over the past five years, Jacobs Engineering has posted compound annual revenue growth of 4.1%, net income growth of 5.7%, and adjusted EPS growth of 5.6%.
We are boosting our fiscal year 2016 adjusted EPS forecast to $3.05 from $3.00, based on the margin benefits from the restructuring. Our estimate implies a 6.4% EPS decline from FY15, on a 5% decline in revenue. In fiscal 2017, we now look for an 8% increase in EPS, to $3.30 (up from $3.20), on a 2% increase in revenue.
Our 2016 projections assume continued global economic challenges, modest margin pressure due to still weak demand, and project delays by customers.
At the same time, we expect the company to benefit from restructuring efforts, which should lower costs, and from modest improvement in its key Life Sciences, Aerospace and Petrochemicals end markets.
JEC shares have outperformed over the past quarter, rising 24%, while the S&P 500 has gained 5%. The shares have also outperformed over the past year, with a gain of 17% compared to a flat performance for the index. The beta on JEC is 1.38.
From a technical standpoint, the shares were in a long-time bearish pattern of lower highs and lower lows that dated to January 2014. However, the shares appear to have broken that pattern after the recent low near $35 in January.
On the fundamentals, the shares are trading at 15.5-times our fiscal 2017 EPS estimate, below the five-year historical average of 17.4. The shares are also attractively valued on a price/sales basis. Our target price of $58 assumes a P/E ratio of 17.6-times next year’s earnings, in line with the historical average.
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By John Eade, Editor of Argus Research
