Morningstar | JEC Updated Forecasts and Estimates from 29 Oct 2018
We are raising our fair value estimate for no-moat engineering and construction firm Jacobs Engineering to $75 from $63 after the company announced the sale of its energy, chemicals, and resources business to WorleyParsons for $3.3 billion. The fair value adjustment is driven by time value of money since our previous update, our new expectation of greater synergies from the CH2M acquisition than in our prior model, as well as improved projected margins due to Jacobs’ focus on its most profitable business segments.With this announcement, management reaffirmed its focus on higher-margin segments. As the remaining business has relatively lower capital needs than the divested ECR segment, management expects the sale will result in an improved cash conversion cycle and higher operating margins. Moreover, following the recent CH2M acquisition and ECR divestiture, Jacobs’ portfolio will be less cyclical, with lower exposure to commodity markets.
We consider the ECR sale to mark another step in CEO Steven Demetriou’s effort to transform Jacobs since he took the helm in August 2015. Thus far, significant restructuring has helped reduced fixed costs, the CH2M acquisition has reaped stronger synergies than we first expected, and the ECR sale should help refocus the company on its most profitable business segments. Moreover, with the proceeds from the transaction, we believe Jacobs will be poised to pursue future acquisition opportunities in higher-margin aerospace, technologies, and infrastructure segments. As such, we are optimistic about the long-term outlook for the company.
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.
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