EUR 850.00 For Business Accounts Only

Morningstar | Jacobs Engineering Posts Solid Second Quarter; Fair Value Estimate Intact

We maintain our $84 fair value estimate for Jacobs Engineering after the no-moat engineering and construction firm posted a solid second quarter, delivering 7.7% year-over-year revenue growth and over 120 basis points of improvement in operating margins. Both segments kept their momentum, as aerospace, technology & nuclear sales grew nearly 15% year over year, while buildings, infrastructure & advanced facilities revenue increased by over 4% from the year-ago period. Management remains optimistic about the rest of fiscal 2019 and bumped its full-year 2019 EPS guidance range by a nickel on both ends to $4.45-$4.85.

Jacobs continued its portfolio transformation, as the firm closed the sale of its energy, chemicals, and resources (ECR) division on April 26 and announced the acquisition of national security solutions provider KeyW on April 22. We think that KeyW’s cyber engineering capabilities will bolster Jacobs’ government services business, and we expect that management will continue to evaluate strategic M&A opportunities to expand its aerospace, technology & nuclear segment portfolio. Furthermore, the CH2M integration is nearly complete and continues to deliver both cost and revenue synergies.

We view the portfolio transformation favorably, as the divested ECR business was more volatile and less profitable than the remaining two segments. We are encouraged by the 120-basis-point improvement in operating margins in the second quarter and continue to project operating margins expanding from 4.3% in fiscal 2018 to roughly 7.5% by the end of our explicit five-year forecast period, driven by strong synergies from the CH2M acquisition, SG&A cost reduction initiatives, and the sale of ECR (whose operating margins have lagged those of the remaining two segments by as much as 200-300 basis points in recent years).