Water means life for humans. Clarification - fresh water means life for humans. The Earth is 70% water. It's led us to believe water is in abundance. But, of the Earth's water, only 2.5% is fresh water. And, of that 2.5%, only 1% is accessible for human use and consumption. Tetra Tech (TTEK) is a consulting, engineering and technical service provider with a focus on water and the environment.
Water use in the past century has grown at twice the rate of the population. Tetra Tech has been in business since 1966. It is ranked in the top 20 by Engineering News-Record, the bible of the construction industry, in several categories - Top Design Firms, Top Green Design Firms, Top Environmental Firms, Top Global Design and Top Program Managers. It is involved in all phases of the water cycle providing solutions for the treatment of wastewater and stormwater, flood control and restoration, and watershed protection for bodies of water. Water and environmental projects comprise 80% of Tetra Tech's business mix which also includes energy, infrastructure and natural resources. Examples of Tetra Tech's business include dams and levees, ports and harbors, oil and gas, mining, and alternative energies such as wind, solar and hydropower.
Tetra Tech has grown revenues by a multiple of 54 in the past 20 years from $50 million to $2.7 billion. The compound annual growth rates (CAGR) for revenues, operating income and earnings per share are 15%, 16% and 16% respectively since 2007. Tetra Tech's growth has also expanded beyond domestic borders. In 2008, only 1% of Tetra Tech revenues were from international sources. By fiscal year-end 2012, Tetra Tech's international revenues have grown to 32%. Another positive shift in Tetra Tech's business mix is a deceleration of dependence on government projects, both federal and state. In 2013, Tetra Tech expects international revenues to grow to 35% of its total, commercial to grow from 27% to 30% and government to decrease from 41% to 35%.
Tetra Tech's future looks as positive as its history. It is projecting long-term revenue growth will average 15% per year. One business driver is the demand for commodities like uranium, precious metals, potash and phosphate. The 2012 revenue from the mining industries should increase by 56% in the next 2 to 4 years. Another driver is the demand for energy and has resulted in increased activity in the oil sands and shale basins. The demand will provide attractive opportunities for Tetra Tech in the next 2 to 4 years. Tetra Tech's 2012 revenue from those industries should more than triple. Besides those drivers, Tetra Tech's funded and authorized backlog at year-end 2012 increased 10% over year-end 2011 to $2.14 billion.
Acquisitions are a key factor in Tetra Tech's growth strategy as it looks for businesses that can increase its financial performance or strategically expand its service offerings or position it in emerging markets. Tetra Tech has, historically, taken advantage of such strategic acquisition opportunities. The result of its acquisition strategy has meant Tetra Tech is not always net cash-positive. However, even with two key acquisitions in 2012, Tetra Tech is currently cash-positive. Investing activity in 2012 was just 27% of the 2011 pace. Cash at year-end 2012 was $105 million while long-term debt was only $83 million.
The 2012 acquisitions were notable for Tetra Tech. The first acquisition, in May, was a mining engineering practice focused on iron ore and precious metals. It represented the first acquisition for Tetra Tech in Brazil, the sixth largest economy of the world. An oil and gas pipeline planning and engineering firm focused on the shale oil regions was acquired in June.
Acquisition activity for 2013 is already underway. In October 2012, Tetra Tech acquired its second Brazilian business, a coastal and oceanographic consulting firm focused on Brazil's deep-water oil. January 3, 2013 brought announcements of both the acquisition of a solid waste management specialist and plans to acquire a Canadian-based service provider for oil and gas pipelines and oilfield facilities.
Tetra Tech's organic growth, without acquisition, is pacing at greater than 10%. Earnings before interest, taxes, deprecation and amortization (EBITDA) is pacing toward Tetra Tech's goal of 13%. Earnings per share ((EPS)) growth is pacing at greater than 15%. Yet, Tetra Tech's share price still appears undervalued when comparing forward earnings estimates to the industry's average price to earnings (P/E) ratio.
Tetra Tech is positioned right in the middle of a hot topic but isn't in hot water at all. Rather, Tetra Tech is proving itself a competent guardian of one of the Earth's most precious resources.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.