Jacobs Holds A Balanced Stance
We reiterate our Neutral recommendation on Jacobs Engineering Group Inc. (NYSE:JEC). While the company’s growing international exposure is impressive, rising construction and labor costs are the expected dampeners.
Global infrastructure development is riding high, with improved highway transit, aviation, rail, waste water disposal and telecom services. This provides room for Jacobs to diversify across markets, geographies and services, accelerating growth and expansion.
Jacobs continues with its contract winning streak from federal and other clients, with acquisitions keeping up pace. In the recent past, pricing per acquisition has also improved in favor of Jacobs, wherein management sees potential for improving margins.
Based on the strategic mix shift toward higher-margin projects, a steady backlog and better labor utilization strategy, Jacobs is well positioned to take advantage of strong secular growth trends relative to its competitors, such as Fluor Corporation (NYSE:FLR) and Foster Wheeler AG (NASDAQ:FWLT).
However, risks persist within the cyclical construction and engineering industry wherein deteriorating economic conditions, reduction in client spending or shift in loyalty adversely impact business. Adding to the woe are the labor availability issues and rising construction costs, which cannot be overlooked.
Jacobs is highly dependent on third-party equipment and materials suppliers. In such a scenario, insufficient funding may hamper suppliers’ business thus exposing Jacobs to delayed project delivery, loss of goodwill or even order cancellation by clients.
Jacobs reaffirmed its earnings guidance for fiscal year 2012 within a range of $2.80 to $3.20 per share based on a steady backlog and improved growth prospects. The company maintains a Zacks #3 Rank, which implies a short-term (1-3 months) Hold rating.