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Will Jacobs' Project Execution Strategy Combat Industry Woes?

Jacobs Engineering Group Inc. J has been rallying on high-value businesses, namely Critical Mission Solutions or CMS and People & Places Solutions or P&PS, as well as efficient project execution. Also, its focus on transitioning from engineering and construction to a global technology-forward solutions company is fueling growth.

The company — which shares space with Quanta Services, Inc. PWR, KBR, Inc. KBR and Altair Engineering Inc. ALTR in the Engineering - R and D Services industry — surpassed earnings estimates in 18 of the trailing 21 quarters.

However, coronavirus-led impacts, stiff industry rivalry, cost burden and currency headwinds remain concerns for this leading professional, technical and construction services provider.

Strategies to Support Growth

Jacobs has been exhibiting strong results, courtesy of increased focus on CMS and P&PS businesses. Notably, the company has been transforming the business to become a more outcome-focused solutions provider. To that end, it has changed the names of its lines of businesses in fourth-quarter fiscal 2019.

Again in April 2019, the company completed the Energy, Chemicals and Resources (“ECR”) business unit’s sale to Australia’s WorleyParsons Ltd., as it intends to focus more on highest-margin growth businesses, as well as combat cyclicality in the global energy and commodity markets.

Apart from these measures, Jacobs outlined margin targets for the next three years (through 2021). Jacobs aims a 125-175 basis points (bps) adjusted operating margin expansion, supported by 100-150 bps increase in CMS margins, 110-140 bps growth in P&PS margin and the elimination of ECR. The margin expansion is expected to be driven by a combination of higher-margin backlog, and focus on generating efficiencies through digital and technological solutions.

Moreover, the company is projecting 3-5% net organic revenue growth, with PPS expected to lead the way with 4-6% top-line CAGR and CMS with 2-3% CAGR. The top-line growth is expected to be driven by recurring revenues that roughly occupy two-thirds of Jacobs’ total revenues, in turn reducing overall risks of market volatility. For the CMS business, it continues to expect more than 10% operating profit CAGR through 2021.

Jacobs is reinforcing the business on the back of acquisitions. On Mar 6, 2020, a unit of Jacobs completed the acquisition of a nuclear consulting, remediation and program management business of John Wood Group, a U.K.-based energy services company.

The company has been registering solid top and bottom-line growth on the back of record backlog and the above-mentioned tailwinds. Backlog at fiscal third quarter-end was $23.7 billion, reflecting an increase of 5.4% year over year (up 4% on a pro-forma basis). This reflects solid demand for Jacobs' consulting services. CMS backlog grew 7.2% year over year (up 3% on a pro-forma basis). P&PS backlog was up 4.3% year over year for the quarter. Overall, the backlog growth can be attributed to the company’s capitalizing on CH2M and KeyW revenue synergies.

In a nutshell, its focus on providing strong technical expertise to mission-critical sectors via serving the U.S. military warfighter and intelligence agencies bodes well. Also, its focus on higher-growth and higher-margin sectors like telecom 5G, data analytics, cybersecurity and C5ISR provide significant growth opportunities.

Headwinds

Although Jacobs’ business has not been much impacted by the coronavirus pandemic in the fiscal third quarter, the same is likely to put pressure on the upcoming quarterly results despite minimum restrictions. The company will witness reduced or delayed project activities owing to social distancing across most of the underlying contract work.

This apart, low-entry barriers in engineering, architectural, consulting and designing market segments have escalated market rivalry for Jacobs. Also, constant appreciation of the U.S. dollar with respect to other major currencies might continue to hurt its overseas market revenues and profitability. Meanwhile, higher costs involved in the transitioning process remain the biggest concern for the company.

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