Morningstar | Jacobs Engineering Portfolio Transformation Should Lead to More Stable Returns; Raising FVE
After taking a fresh look at Jacobs Engineering, we raise our fair value estimate to $84 per share from $75 as we expect the firm’s recent portfolio transformation, including the acquisition of CH2M in 2017 and the sale of Jacobs’ energy, chemicals, and resources (ECR) business to WorleyParsons in 2019, to lead to higher margins and lower volatility. Our change in valuation is primarily due to a projected operating margin expansion from roughly 4.5% in 2018 to 8% by 2021, as well as a lower weighted-average cost of capital assumption (roughly 8.5% versus nearly 10% previously), which reflects the company’s lower risk profile following the sale of the highly cyclical ECR business.Our projected operating margin expansion is driven by strong synergies from the CH2M acquisition, SG&A cost reduction initiatives, as well as an immediate bump following the sale of ECR, whose margins have lagged those of the remaining two segments by as much as 200-300 basis points in recent years. Furthermore, we believe that the CH2M acquisition has increased Jacobs’ exposure to end markets with positive secular long-term trends, such as water and transportation, as we think that increased infrastructure spending will be necessary to replace aging infrastructure in the U.S.
Lastly, we reiterate our no-moat rating. We believe that most engineering & construction firms, including Jacobs, lack economic moats due to an unfavorable industry structure. A fragmented industry, powerful customers, and the prevalence of projects with standardized specifications lead to intense price-based competition and limited opportunities for differentiation. Industry cyclicality and the risk of negative events (such as cost overruns and legal disputes) have historically driven relatively volatile returns on invested capital, and we don’t expect that to change. In the long run, we expect Jacobs to earn average returns on invested capital roughly in line with its cost of capital.
Jacobs Engineering Group provides services including consulting, technical, scientific and project delivery for the government and private sector. The company's lines of business are: Critical Mission Solutions, which provides cybersecurity, data analytics, software application development, enterprise and mission information technology, systems integration and other technical consulting solutions to government agencies as well as aerospace, automotive and telecom customers; and People and Places Solutions, which provides end-to-end solutions for its clients' projects, whether connected mobility, water, smart cities, manufacturing or the environment.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.