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Jacobs Engineering Stock Can Continue To Outperform (NYSE:J)

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Investment Thesis

Jacobs (NYSE:J) is expected to benefit from the United States Infrastructure, Investment, and Jobs Act (IIJA), as more than 90% of the company’s business is aligned with funding areas related to this bill. This funding should help build the company’s backlog, which will support the company’s future revenue growth. To take advantage of this funding environment, the company is making investments in its personnel and increasing the employee headcount. In addition, since the U.S. government passed the Omnibus appropriation bill in March, delayed projects should now begin to ramp up. This should help the company’s revenue growth in the second half of 2022. Jacob’s is trading at 19.64x FY22 EPS and 17.14x FY23 EPS. The stock has outperformed the broader markets since I recommended buying it in my last article and is up 13.19% versus S&P 500’s (SPY) 2.22% decline in the same period. Given the company’s good growth prospects and reasonable valuations, I believe this outperformance can continue. Hence, I have a buy rating on the stock.

Last Quarter Earnings

Earlier this month, Jacobs reported earnings for the second quarter of the fiscal year 2022 that were better than expected. Net sales for the quarter was $3.83 billion (up 8.1% Y/Y), exceeding the consensus estimate of $3.6 billion. In addition, during the quarter, adjusted EPS increased by 4% year over year, from $1.66 in Q1 FY21 to $1.72 (vs. the consensus estimate of $1.68). The revenue increase during the quarter was due to incremental revenue from the BlackLynx, StreetLight, and Buffalo group acquisitions, as well as increased spending by the US government, partially offset by a 150 basis point negative impact from foreign currency translation.

Backlog And New Order Growth

Revenue increased 8% year over year during the quarter, while net revenue (excluding pass-through revenue) increased 10%. The backlog increased by 9% year over year from $25.6 billion in Q2 FY21 to $27.8 billion in Q2 FY22. The Critical Mission Solutions (CMS) segment’s revenue increased 4.3% Y/Y during the quarter, partially offset by a nearly 100 basis point negative impact from foreign exchange. CMS revenue growth lapped the impact of a lower-margin large procurement contract’s contract runoff and benefited from a large DOE environmental remediation contract win in Idaho. In addition, a large space intelligence contract win in Q1 2022 along with other contract wins boosted the order backlog by 8% Y/Y to $10.6 billion. The CMS segment’s diverse portfolio which includes telecom, space & intelligence, cyber, and defence provides a good pipeline of opportunities. Due to easier comps, acceleration in the telecom business, the ramp-up of large environmental contracts, and the passing of the Omnibus appropriation bill in March, revenue in the CMS segment should grow in double digits in the second half of 2022.

Revenues increased 1.4% Y/Y in People & Places Solutions (PP&S) segment, while net revenue increased 2.8%, driven by infrastructure stimulus in America and steady government funding in the international business, partially offset by the unfavourable impact of FX. During the quarter, the backlog increased 9.4% year over year to $1.7 billion, as sales momentum grew across multiple markets, geographies, and U.S. infrastructure markets. Due to the global infrastructure stimulus in transportation, water, energy, and environment, as well as advanced manufacturing, the company is seeing double-digit pipeline growth. Also, the company is experiencing benefits from the budget resolution and seeing a significant build in its 12 to 18 months pipeline from the infrastructure stimulus projects.

Given the easier comps, the second half of 2022 should be better for the PP&S segment, and the additional funds coming into play in 2023 from the US Infrastructure, Investment, and Jobs Act (IIJA) should drive the company’s future growth. To better place itself in capitalizing on this opportunity the company is making investments in its personnel and building its employee headcount.

Over 80% of the $550bn U.S IIJA is aligned with the Jacobs’ infrastructure markets (Water, Transportation, Telecom) with ~12% aligned with other markets (Energy & Environment, Advanced Manufacturing). This gives Jacobs an excellent opportunity to benefit from the Infrastructure Act and build its long-term order pipeline.

Jacobs Engineering - exposure to IIJA spend

Jacobs exposure to IIJA spend (Company Investor day presentation)

Margins

Due to the ramping up of a large environmental remediation contract, which had lower margin, and the delay of higher-margin shorter-cycle awards that were pushed back due to the continuing resolution, the operating margin in the CMS segment fell 40 basis points Y/Y to 8.3% in Q2 FY22. Now as the Omnibus appropriation bill has passed in March, the operating margin is expected to improve in the second half with the ramp-up of projects. Due to increased G&A costs as the company spends on strategic investments to position itself for longer-term business growth from the infrastructure bill, the operating margin in the PP&S line of business fell 100 basis points Y/Y to 11.9%. However, I am not too worried about this decline as the company will eventually benefit from it as it will help it win more projects.

Jacobs Engineering Operating Margin

Jacobs Operating Margin (Company data, GS Analytics Research)

The company’s longer-term margin prospects look good with CMS margins expected to improve in the long term as low margin Idaho nuclear contract gets completed and higher-margin PA consulting segment continues to grow.

Valuation & Conclusion

Jacob’s is trading at 19.64x FY22 EPS and 17.14x FY23 EPS. On its March investor day, management highlighted its target to reach between $10 and $12 in EPS by FY2025 versus the FY2022 expected EPS of $7.13 (consensus estimates). So, the company has good growth prospects. The company’s longer-term revenue and margin outlook are attractive. With significant government funding coming over the next few years and the company’s good execution history, I am optimistic about its prospects. Hence, I have a buy rating on the stock.


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