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Morningstar | Jacobs Engineering 3Q Results Reflect Impressive Margins and Revenue Growth; We Raise Our FVE. See Updated Analyst Note from 06 Aug 2018

We raised our fair value estimate to $63 from $60 per share because of the time value of money since our previous update, as well as solid third-quarter results. This adjustment is driven by accelerating signs of stability and growth, leading us to modestly increase our 2018 and 2019 forecasts for revenue growth and profitability. We continue to believe that Jacobs will benefit from lower tax rates, repatriation incentives, and regulatory reforms which will provide incentive for greater capital outlays on customer project work.

The recent uptick in fortunes for Jacobs contrasts positively with a challenging period over the past few years. The backlog increased to $27.2 billion, up around 8% on a pro forma basis from a year ago. Approximately 75% of backlog came from higher margin businesses. The future backlog will benefit principally from demand across aerospace, technology, and buildings and infrastructure. The CH2M acquisition continues to integrate well, with management citing an increase in its cost synergy target from $150 million to $175 million.

Third-quarter results represented laudable top line growth stemming from improving total project demand. Third-quarter adjusted EPS was $1.35, a 71% increase over the prior year. Most company-wide metrics fared well compared with the prior year, with revenues up 14% on a pro forma basis. Adjusted operating margin was 6.4%, representing an 80 basis point increase compared with the third quarter of 2017.

Following these healthy results, management now expects adjusted EPS to be at the high end of prior guidance of $4.00-$4.40. This compares favorably with adjusted EPS of $3.23 in fiscal 2017 and $3.08 in fiscal 2016. The company also released guidance for 2019 adjusted EPS of between $5.00 and $5.40.

Since starting as CEO in August of 2015, Steven Demetriou has catalyzed significant change at no-moat-rated Jacobs Engineering. Significant restructuring helped reduce fixed costs, streamline the company's operating structure, and refocus senior management. Additionally, the acquisition of privately held E&C CH2M has gone better than planned, with net synergies of $175 million expected to be achieved by the end of the 2020. This acquisition positions Jacobs for healthy growth in infrastructure and government services.

Compared with competitors that target a handful of big complex projects, Jacobs pursues a lower-risk strategy that aims to develop a portfolio of small to midsize projects across diverse industries. This diverse set of business lines allows the company to shift industry focus and service priorities in response to economic and cyclical fluctuations. We believe aerospace & technology should benefit from healthy demand in federal and commercial aviation markets in the U.S., while buildings & infrastructure should benefit from population growth, aging infrastructure, and urbanization in the U.S., Asia, and the Middle East.