Jacobs Engineering: Earnings Preview

Jan.24.11 | About: Jacobs Engineering (JEC)

Jacobs Engineering Group Inc. (NYSE:JEC) is scheduled to report its first quarter 2011 results before the market opens on January 25. Historically, the Jacobs’ earnings have been consistently below the Zacks Consensus Estimate.

However, we expect a modest recovery in Jacobs’ business in the upcoming year after bottoming-out in fiscal 2010. Nevertheless, the decrease in backlog in fiscal 2010 would have a negative impact on the top-line of fiscal 2011.

Last Quarter and Fiscal 2010 Highlights
Jacobs reported disappointing operating results for the fourthquarter and fiscal 2010 with both top-line and bottom-line results reporting below expectations.

Quarter Highlights
During the quarter, Jacobs reported EPS of $0.61, $0.02 below the year-ago level of $0.63, and $0.01 below the Zacks Consensus Estimate of $0.62.

Net earnings and revenues were $77.0 million and $2,343.0 million respectively, reflecting decreases of 2.9% and 8.2% from $79.3 million and $2,552.5 million in the year-ago quarter. Revenues were slightly down from the Zacks Consensus Estimate of $2,510.0 million.

The decline was attributable to a not-so-significant recovery in the economic conditions and the continuous decrease in the company's backlog, coupled with higher operating costs.

Annual Details
During fiscal 2010, Jacobs reported EPS (excluding one-time items) of $2.48, down from $3.21 during fiscal 2009. However, the reported EPS was above the Zacks Consensus Estimate of $2.45.

The above EPS excludes the one-time items of restructuring expense of $5.8 million or $0.04 per share during the first quarter of fiscal 2010 and the litigation expenses of $60.3 million or $0.48 per share during the third quarter of fiscal 2010.

Net earnings (excluding one-time items) were $312.1 million, representing a fall of 22.0% from $399.9 million in fiscal 2009. Revenues were $9,941.4 million, down from $11,467.4 million, representing a 13.3% decrease from fiscal 2009. Revenues were below the Zacks Consensus Estimate of $10,110.0 million.

Agreement of Analysts
In the run-up to the earnings release, only 6 of the 23 analysts covering the stock have raised their estimates for fiscal 2011 in the last 30 days; while only one analyst decreased his/her estimate. A downward revision in estimates was witnessed in the first quarter of fiscal 2011 in the last 30 days.

Three out of 19 analysts reduced their estimates as opposed to only one increasing the same. The downward pressure in the first quarter was based on the slow recovery in economic conditions and the decrease in the company's backlog in fiscal 2010.

Magnitude of Estimate Revisions
For the first quarter of fiscal 2011, analysts’ estimates dropped by a penny to $0.59 per share, while for fiscal 2011 it increased by a penny to $2.56 per share. Thus, the revision trend remains uncertain.

With respect to earnings surprises, Jacobs has missed the Zacks Consensus Estimate only once in the trailing four quarters. This is reflected in the average earnings surprise of 4.3%, which indicates that Jacobs has surpassed the Zacks Consensus Estimate by that measure.

Our Recommendation
Jacobs’ diversification across markets, geographical regions and services will also help generate growth. Jacobs’ plans to expand into the emerging markets of India, China and the Middle East, which are expected to perform much better than the developed markets in the coming years.

Moreover, Jacobs’ ongoing acquisition strategy and robust liquidity position will help it to emerge stronger than its competitors like Fluor Corporation (NYSE:FLR) and Foster Wheeler AG (FWLT). At the end of the third quarter of fiscal 2010, Jacobs’ net cash position was $847.6 million.

However, Jacobs’ continuous decrease in backlog since the beginning of fiscal 2010 is expected to negatively affect its top-line in fiscal 2011. Further, the stock is cyclical in nature; therefore the sluggish economic environment, which has reduced the spending power of clients, is the prime reason for the decrease in backlog. Investors fear infusing capital in these unstable market conditions.

The company also faces immense risk as it operates in a highly-competitive environment. Hence, we maintain our Neutral recommendation on the stock. The stock currently retains a Zacks #3 Rank (short-term Hold rating).