URS Corporation (NYSE:URS) is an engineering and design services company which derives a fair amount of its business from U.S. Government contracts. These contracts are mainly for systems engineering, but also for construction operations and project management. Already in 2008 URS has won bids on contracts to head up nuclear waste remediation and flight training projects. In late 2007, URS completed the acquisition of The Washington Group [TWG] for $3.1 billion. OSHA has just reaffirmed its alliance with TWG, especially in nuclear waste cleanup projects. URS‘s business backlog soared to $18.71 billion which is more than four times greater than the prior year backlog. However, after releasing results from fiscal 2007 the stock has tumbled nearly 20% as future forecasts call for moderating growth.
The results for 2007 were essentially in line with estimates, but based on the flurry of activity surrounding the company many investors had hoped that URS would have outperformed. The company raised profits by 17% over the year before, but the tepid prognosis for the coming year triggered a sell-off in the stock. The company’s revenue projections fell $300 million short of analysts’ forward looking estimates and earnings were also well below what analysts had predicted.
The company cited a slowing economy and a difficult infrastructure spending market as the reasons to expect moderating growth in 2008. Local and state governments are under increasing budgetary pressure, which will only worsen as tax revenue falls during a slowdown. Thankfully, at least for a while, URS can start to work through its backlog of work and should enjoy a “soft landing”.
Ockham had rated URS as a sell prior to Wednesday’s plunge, as our rationally expected high for the stock is just barely above $45 based on historical precedents. Since the stock was already slightly overvalued, when disappointing forecasts were released URS took a brutal but justified fall. For now, we think that a fair price target for URS is about $36.40. We are therefore comfortable rating the stock a Hold for the time being, as it may very well have a bit further to fall. However, after yesterday’s drop URS no longer meets a Sell rating.