When equity markets collapse it tends to hurt all equities, the weak and the strong. Just as a rising tide lifts all boats, when the tide goes out, all boats—or stocks in this instance—usually go down.
During the recent market collapse, we reevaluated and reinstated 21 “buy” recommendations. That is the same number of names added in the entire first half of the year when the market was overvalued and we were hesitant to make bullish calls on individual names.
One of the bargains we found was Jacobs Engineering Group (JEC), which we moved to a buy from a hold at $39.65. Our 2017 price target is $48.
We closed out JEC on April 16 and locked in a 20% gain (+1400 basis points versus the S&P 500) after just a four-month holding period. JEC has since dropped by 20% and underperformed the S&P 500 by 1000 bps.
We decided to take advantage of a 400-point drop in the Dow Jones on Sept. 1 to reinstate this name with a $48 target for 2017. JEC with a market cap of $5 billion is trading where it was 10 years ago (see “Picking a winner (again)”).
Founded in 1947, JEC is one of the leading providers of professional, technical and construction services to industrial, commercial and governmental clients. The company provides its services through more than 200 offices and subsidiaries located principally in North America, Europe, Asia and Australia. JEC is headquartered in Pasadena, Calif., and the workforce comprises approximately 66,300 employees across more than 30 countries. The company has received numerous accolades, including being on Forbes 100 Most Trustworthy Companies.
JEC’s four business segments are: Project Services (51.8% of FY14 revenues); Process, Scientific and Systems Consulting Services (6.0% of FY14 revenues); Construction Services (32.6% of FY14 revenues) and Operations and Maintenance Services (9.6% of FY14 revenues). Together, Project, Process and Scientific and Systems Consulting Services are commonly referred to as Technical Professional Services, while the latter two are referred to as Field Services. The company also operates in nine end markets: Chemicals & Polymers, Refining—Downstream, National Government Programs, Infrastructure, Mining & Minerals, Oil & Gas—Upstream, Buildings, Industrial and others and Pharma & Biotech.
JEC is trading at 12X earnings with earnings per share estimates grinding higher in the last three months, from $3.22 to $3.38.
Even though the market remains over-valued and there is a good chance that the market and JEC re-test their respective 52-week lows, it is a strong play. Our research indicates a 10% downside risk in JEC, but a 20% upside for whoever can hold this for 12-18 months.
JEC beat estimates by 23¢ in its July 28 report, missed on revenues, raised FY15 EPS above consensus, and reauthorized an additional $500 million share buyback. Revenues for Q2 fell 10% year-over-year to $2.91 billion vs. the $3.02 billion consensus.
JEC raised guidance for FY15, seeing EPS of $3.11-$3.31 from $2.90-$3.20 versus the $3.03 consensus estimate. JEC should see the benefit of restructuring in FY 2016, while some benefits are being realized in FY 2015, as indicated by the lower general and administrative expenses figures in Q2.
There is continued strength in a total backlog of $18.8 billion.
JEC was a solid performer for us and is back at a level where it deserves a place in any portfolio.