Jacobs: Earnings Scorecard

Aug. 3.10 | About: Jacobs Engineering (JEC)

Following the third quarter results on July 26, the analysts have been pessimistic on Jacobs Engineering Group Inc. (NYSE:JEC) based on the continuous decrease in the company’s backlog and the expectations of slower market recovery. Management has narrowed its fiscal 2010 guidance to $2.30-$2.65 per share from $2.15-$2.65.

Earnings Review

Jacobs reported in-line results for the third quarter of fiscal 2010. During the quarter, Jacobs reported an EPS of 63 cents, 13 cents below the year-ago level of 76 cents, but a penny above the second quarter 2010 EPS of 62 cents. It exactly matched the Zacks Consensus Estimate of 63 cents.

The above EPS excludes one-time items like, litigation expenses of $60.3 million or $0.48 cents per share. On June 25, Jacobs France SAS, a subsidiary of Jacobs lost a law suit at a French Tribunal. The suit was filed in relation to a contract for the erection of a waste incineration plant in Sausheim, France by Serete for the SIVOM de Mulhousienne. However, the contract was entered into before Jacobs took over Serete. On completion of the contract, Jacobs claimed additional cost of $49 million as damages. On the other hand, SIVOM claimed that the delay in completion of the contract led them to incur additional operating costs.

Both, net earnings and revenues, excluding non-recurring expense, were $79.3 million and $2,533.6 million, respectively, down from $94.9 million and $2,706.7 million in the year-ago quarter. Revenues were slightly down from the Zacks Consensus Estimate of $2,573.0 million. The decline was attributable to soft economic conditions. However, an increase in selling general and administrative (SG&A) expense was another reason for the decline in net earnings.

Agreement of Analysts

Slower market recovery forced analysts to reduce their EPS estimates. Jacobs recorded a continuous sequential decrease in backlog. During the first quarter of fiscal 2010, backlog reduced to $14.9 billion from $16.0 billion in the previous quarter. In the second quarter, it reduced to $14.7 billion, and finally in the third quarter to $13.5 billion. The decrease was attributable to unstable market conditions causing large investors to hold back investments.

Thus, for the immediate quarter, out of the 19 analysts covering the stock 6 analysts moved their estimates in the downward direction while only one increased it in the last 7 days. However, during fiscal 2010, out of the 18 analysts, 5 raised their estimates, while 4 lowered theirs. Analysts raised their estimates to adjust to the new narrowed EPS guidance provided by Jacobs. For fiscal 2011, out of the 20 analysts, 13 analysts reduced their estimates while none moved in the opposite direction. Thus, the overall trend was negative.

Magnitude of Estimate Revisions

For the fourth quarter of fiscal 2010, estimates went down by a cent to 62 cents from 63 cents. For fiscal 2010, it moved up by a cent to $2.45 per share, while for fiscal 2011 EPS fell by 10 cents to $2.64 from $2.74.

With respect to earnings surprises, Jacobs had a mixed track record in the preceding four quarters. In the last three quarters, it recorded a positive surprise, while the quarter preceeding those three quarters was negative. However, the company produced an average positive earnings surprise of 2.53% over the last four quarters, meaning that Jacobs has beaten the Zacks Consensus Estimate by that measure.

Our Recommendation

Jacobs’ track record of contract wins and strong liquidity position will help it to perform well in future. The company’s’ ongoing acquisition strategy will also help it to strengthen its position in the coming years. However, the very cyclical nature of its business, which is subject to significant fluctuations based on a wide variety of uncontrollable factors, hinder further upgrade of the stock.

Jacobs also faces immense risk as it operates in a highly competitive environment. Thus, we reiterate our Neutral recommendation on the stock until any significant recovery in the market. However, our short term rating remains Sell, equivalent to the Zacks #4 Rank, based on concerns over the continuous decrease in backlogs.