Jacobs Engineering Group: Earnings Preview

Nov.12.10 | About: Jacobs Engineering (JEC)

Click to enlargeJacobs Engineering Group Inc. (NYSE:JEC) is scheduled to report its fourth quarter and fiscal 2010 operating results on November 16. Management expects fiscal 2010 EPS to be in the range of $2.30-$2.65 and the Zacks Consensus Estimate to remain at $2.45 per share.

Third Quarter Highlights

On July 26, Jacobs reported in-line results for the third quarter of fiscal 2010. During the quarter, Jacobs reported earnings per share (EPS) of $0.63, a decrease of $0.13 from the year-ago level of $0.76, but a penny above the second quarter 2010 EPS of $0.62. It exactly matched the Zacks Consensus Estimate of $0.63.

The above EPS excludes the one-time item like litigation expenses of $60.3 million or $0.48 cents per share. On June 25, Jacobs France SAS, subsidiary of Jacobslost a law suit at the France 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 costs 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, reflecting 16.4% and 6.4% 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 not so significant recovery in the economic conditions. However, an increase in selling, general and administrative (SG&A) expense can be another reason for the decline in net earnings.

During the quarter, backlog totaled $13.5 billion, down from $14.7 billion in the previous quarter and $15.8 billion at the end of the third quarter last year. However, the company has maintained a high level of liquidity, with a net cash position of $847.6 million compared with $743 million at the end of the second quarter of fiscal 2010.

Agreement of Estimate Revision

In the last 30 days there has been no change in the analyst’s behavior for the immediate quarter and the fiscal 2010. However, for fiscal 2011, two analysts lowered their estimate while none supported them in the opposite direction. Analysts were concerned of the continuous decrease in the backlog in 2010, which might have negative effect on the top-line results in fiscal 2011.

Magnitude of Estimate Revision

Estimates for the fourth quarter and fiscal 2010 remained at 62 cents and $2.45 per share, respectively. For fiscal 2011, estimate went down by a penny to $2.58 per share.

Jacobs has delivered a mixed earnings surprise over the past few quarters, while the average earnings surprise for the last four quarters was a positive of 2.53%, which signifies that the company surpassed the Zacks Consensus Estimate by that measure.

Our Take

We maintain our Underperform recommendation on the stock based on the continuous decrease in backlog since the beginning of fiscal 2010, which is expected to negatively affect its top-line results in fiscal 2011.

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 the unstable market conditions, where large investors were apprehensive of infusing capital.

Jacobs Engineering faces immense risk as it operates in a highly-competitive environment. Hence, the stock currently retains its Sell rating (Zacks #4 Rank) for the shorter term.

Disclosure: No position