Jacobs: Turnaround in Engineering

09/01/2016 8:00 am EST

Focus: STOCKS

John Eade

President and Senior Analyst, Argus Research Group

Both presidential candidates talk about increasing spending on infrastructure. But where might the money be spent? And how much? asks John Eade, analyst with Argus Research.

Infrastructure spending can be divided into a number of target areas: highway, power, transport, residential, office, healthcare, public safety, etc.

Our research indicates that US public spending on infrastructure — including spending by federal, state and local governments — totaled $506 billion in 2015.

This was up 2% year-over-year and up 27% over the past 10 years; however, it was also down 28% from the $700 million spent in 2011, as the US economy emerged from recession.

Our rating on Focus List selection Jacobs Engineering Group (JEC) is BUY. Jacobs is a mid-cap provider of technical, professional and construction services.

The company has been restructuring its operations for several years and continues to face both macroeconomic pressures and weakness in important end markets.

However, we are beginning to see progress in its turnaround and are attracted by the company’s solid balance sheet and current valuations.

From a technical standpoint, the shares had been in a long-term bearish pattern of lower highs and lower lows that dated to January 2014. However, they appear to have broken that pattern after a recent low near $35 in January.

The shares have outperformed over the past year, with a gain of 24% compared to a gain of 5% for the index. The beta on JEC is 1.37.

We are boosting our FY16 adjusted EPS forecast to $3.10 from $3.05, based on the margin benefits from the restructuring. Our estimate implies a 5% EPS decline from the $3.26 reported in FY15, on a 5% decline in revenue.

In FY17, we continue to look for EPS of $3.30, on a 2% increase in revenue. Our FY17 projections assume continued global economic challenges, modest margin pressure due to still weak demand, and project delays by customers.

On the fundamentals, the shares are trading at 16.1-times our FY17 EPS estimate, below the five-year historical average of 17.4. Our revised target price of $60 assumes a P/E of 18.2 times next year’s earnings, in line with the historical average.

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By John Eade, Analyst with Argus Research

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