Jacobs Engineering: Continues To Outperform As A Transformational Cinderella Story

About: Jacobs Engineering Group Inc. (JEC)
by: Trent Welsh

Jacobs Engineering has minimal China exposure, so its performance is not subject to the whims of geopolitical turmoil like other big industrial names.

The company's transformational M&A activity means higher value and more stable future revenues instead of being beholden to oil cyclicality.

Expect growing EPS numbers and a rapidly growing annual dividend in future years as Jacobs rounds into form.

It continues to be a low-debt company focused on a conservative balance sheet with plenty of M&A firepower.

Jacobs Engineering Group Inc. (JEC) is a safer industrial in a turbulent world, as the trade and tariff war with China has little effect on Jacobs's performance as a global leader in industrial products and services. The company's transformation is nearing an end, where it has positioned itself to win higher-value projects from its CH2M acquisition, while finally ridding itself of its poorly performing cyclical Energy, Chemicals, and Resources (ECR for short) division. The new company could easily feature a double-digit annual growing dividend, EPS guidance raises, a healthy and growing backlog, and expanding margins as it starts to fully realize the synergies of its M&A spree over the coming years.

As September rolls around and new tariffs are enacted in the standoff between the U.S. and China, Jacobs Engineering is mainly on the sidelines concerning China, while other major industrials are whipsawed around along with the Industrial Select Sector SPDR ETF (XLI).

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In good times, when trade talks seem to be progressing and global demand seems stable, Jacobs tends to run with the other industrials as global demand peaks and wanes. However, when China fears start to creep up, as they recently have when new tariffs went into effect on September 1, there has been a noticeable difference in the performance between Jacobs and other key industrials with big China exposure, including Caterpillar Inc. (CAT) and The Boeing Company (BA).

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This can be seen over the past year also, as Jacobs was actually lagging the ETF and other industrial leaders before clearly separating itself from the herd with heightened China fears along with turning around its own business by way of significant M&A acquisitions and divestitures that are catching investors' eyes.

Here is what Jacobs has been up to over the past couple of years, as it has completely revamped its business lines after major M&A activity.

JEC Date M&A Value
Woods Nuclear 8/20/19 Acquisition ~$300M
KeyW 5/13/19 Acquisition ~$815M
WorleyParsons 4/29/19 Divestiture ~$3.3B
CH2M 12/18/17 Acquisition ~$2.85B

Table by Trent Welsh

Jacobs's transformation into its current form started with the acquisition of the private Colorado company CH2M in late 2017 for ~$2.85 billion. Jacobs is just now entering into the final stages of that integration as it continues to pivot towards higher-value and higher-margin projects. This transformation has been remarkable to watch, as the big acquisition was more recently offset with the divestiture of the company's Energy, Chemicals and Resources segment to WorleyParsons Limited (OTCPK:WYGPY) for ~$3.3 billion in April 2019. Here's what the addition of CH2M has helped do for the company's margins over the past almost 2 years that Jacobs has been successful in focusing on acquiring and winning higher-value projects with better margins.

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Getting rid of the horribly performing ECR segment that has been a drag on earnings since the crash of oil in 2014 should only help improve numbers over the coming years as oil & gas stocks continue strong underperformance in the current market environment even as the U.S. tries to become energy independent.

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The separation of Jacobs from its oil and chemicals exposure after its ECR sale has helped to explain the divergence of the company from oil prices over most of 2019, as oil continues to lag while Jacobs is finally strongly outperforming. The ECR sale should also help to stabilize the company's earnings in the future, as it should not be subject to the cyclicality of the oil market like it has been in the past.

As Jacobs transforms into a more profitable and stable company with a nicely growing backlog of high-value projects, investors could expect yearly double-digit growing dividends, as the company should have plenty of free cash flow to aggressively grow its dividend in the coming years. Jacobs raised its dividend 13.3% in January 2019, which still only gives investors a current yield of approximately 0.77%. This means that it should have plenty of free cash flow to support future double-digit increases in coming years for long-term holders.

Jacobs also has an accelerated share repurchase plan in place, which has resulted in ~$250 million in stock buybacks in the previous quarter along with an additional $100 million of purchases through August 2nd in the current quarter. The company continues to aggressively buy back its shares after it approved a $1 billion share buyback program early in 2019 which was formed with a 3-year duration. At the rate Jacobs is buying back its stock, it looks likely to exhaust its current buyback program well before that deadline expires. This program should help to support rapidly growing EPS numbers as it could beat and raise EPS guidances regularly as it transforms into a more profitable company with less outstanding shares.

Jacobs continues to grow and transform as it maintains a low-debt company structure that gives it plenty of firepower to continue to opportunistically acquire additional high-value growth propositions. Before the ~$2.85 billion CH2M acquisition, Jacobs prided itself on being pretty much a zero-debt company. Since then, the ~$3.3 billion divestiture of its ECR division has meant that a chunk of the company's long-term debt has now been paid off again, as the company currently has ~$1 billion in cash and ~$1.2 billion in total debt, resulting in only a little over ~$200 million in net debt after its last earnings call.

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Jacobs Engineering continues to separate itself from other industrial stalwarts more closely tied to the China and U.S. trade and tariff debacle. With minimal China exposure, the company can trade on its performance going forward instead of the ups and downs of geopolitical speculation. Jacobs continues to display a strong upward trend, as the company's CH2M acquisition is in its final stages and is already paying for itself in higher-margin, more value-creating projects defining the company's backlog. The company's divestiture of its ECR segment means that Jacobs will no longer be glued to the global cyclical nature of oil which has been an anchor on its earnings since 2014's oil crash. The new, more stable and profitable Jacobs continues to be a conservative company where debt is concerned and has the free cash flow to implement impressive annual dividend and EPS growth from aggressive stock buybacks in the coming years. I continue to be long Jacobs Engineering as a core position in my portfolio that I have no intention of selling anytime in the near or far future. Best of luck to all.

Disclosure: I am/we are long JEC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.