Jacobs Engineering stock may continue to outperform (NYSE:J)

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Investment thesis

Jacob (NYSE:J) is expected to benefit from the United States Infrastructure, Investment, and Jobs Act (IIJA), as more than 90% of the company’s business is aligned with the funding areas related to this bill. This funding should help build the company’s backlog, which will support the company’s future revenue growth. To take advantage of this funding environment, the company is investing in its staff and increasing its workforce. Additionally, since the US government passed the Omnibus Appropriations Bill in March, delayed projects should now begin to ramp up. This should contribute to the company’s revenue growth in the second half of 2022. Jacob’s is trade at 19.64x FY22 EPS and 17.14x FY23 EPS. The stock has outperformed broader markets since I recommended buying it in my last post and is up 13.19% against the S&P 500 (TO SPY) Down 2.22% over the same period. Given the company’s good growth prospects and reasonable valuations, I believe this outperformance can continue. Therefore, I have a buy rating on the stock.

Last quarter results

Earlier this month, Jacobs reported better-than-expected second-quarter fiscal 2022 results. Net sales for the quarter were $3.83 billion (up 8.1% year-on-year), beating the consensus estimate of $3.6 billion. Additionally, during the quarter, Adjusted EPS increased 4% year-over-year from $1.66 in Q1 FY21 to $1.72 (vs. consensus estimate of $1.68 ). The increase in revenue in the quarter was driven by incremental revenue from the BlackLynx, StreetLight and Buffalo group acquisitions, as well as increased US government spending, partially offset by a 150 basis point negative impact from the foreign currency conversion.

Order book and growth in new orders

Revenue increased 8% year-over-year in the quarter, while net revenue (excluding pass-through revenue) increased 10%. Backlog increased 9% year-over-year from $25.6 billion in Q2 FY21 to $27.8 billion in Q2 FY22. Critical Mission Solutions (CMS) segment revenue increased 4.3% year-on-year in the quarter, partially offset by a negative currency impact of nearly 100 basis points. CMS’s revenue growth outpaced the impact of a large, low-margin supply contract and benefited from a major environmental remediation contract won by the DOE in Idaho. Additionally, a major space intelligence contract won in the first quarter of 2022, along with other contract wins, pushed the backlog up 8% year-over-year to $10.6 billion. The diversified portfolio of the CMS segment, which includes telecommunications, space and intelligence, cybersecurity and defense, offers a good pipeline of opportunities. Due to easier competition, the acceleration of the telecommunications sector, the ramp-up of major environmental contracts and the adoption of the Omnibus finance bill in March, the turnover of the CMS segment is expected to grow by double digits in the second half of 2022.

Revenue increased 1.4% year-over-year in the People & Places Solutions (PP&S) segment, while net revenue increased 2.8%, driven by the infrastructure revival in Americas and stable government funding in international activities, partially offset by the unfavorable currency impact. During the quarter, backlog grew 9.4% year-over-year to $1.7 billion as sales momentum increased across multiple markets, geographies and infrastructure markets in the USA. Due to the global infrastructure revival in transportation, water, energy and environment, as well as advanced manufacturing, the company is seeing double-digit growth in its pipeline. Additionally, the company is enjoying the benefits of fiscal resolution and seeing a significant increase in its 12-18 month pipeline due to infrastructure stimulus projects.

Given the easier comps, the second half of 2022 should be better for the PP&S segment, and the additional funds coming into play in 2023 from the US Infrastructure, Investment, and Jobs Act (IIJA) should boost growth. future business growth. In order to better seize this opportunity, the company is investing in its personnel and strengthening its workforce.

Over 80% of the US$550 billion IIJA is aligned with Jacobs infrastructure markets (Water, Transport, Telecom) with approximately 12% aligned with other markets (Energy and Environment, Advanced Manufacturing). This gives Jacobs a great opportunity to benefit from the Infrastructure Act and build its long-term backlog.

Jacobs Engineering - exposure to IIJA expenses

Jacobs’ Exposure to IIJA Expenses (Presentation Business Investor Day)


Due to the ramp-up of a large environmental remediation contract, which had a lower margin, and the delay of higher-margin, shorter-cycle awards that were pushed back due to continued resolution, the CMS segment operating margin fell 40 basis points Y/Y to 8.3% in Q2 FY22. Now that the Omnibus finance bill was passed in March, the operating margin should improve in the second half as projects ramp up. Due to increasing general and administrative expenses as the company spends on strategic investments to position itself for longer-term business growth from the infrastructure bill, the segment’s operating margin PP&S activity fell 100 basis points year-over-year to 11.9%. However, I am not too worried about this drop as the company will eventually benefit from it as it will help them win more projects.

Jacobs Engineering operating margin

Jacobs operating margin (Company data, GS Analytics Research)

The company’s longer-term margin outlook looks good, with CMS margins expected to improve over the long term as Idaho’s low-margin nuclear contract winds down and the higher-margin PA consulting segment high continues to grow.

Evaluation and conclusion

Jacob’s is trading at 19.64x FY22 EPS and 17.14x FY23 EPS. At its Investor Day in March, management outlined its goal of achieving between $10 and $12 EPS by FY25 versus expected FY2022 EPS of $7.13 (estimates). consensual). Thus, the company has good growth prospects. The company’s longer-term revenue and margin prospects are attractive. With significant government funding to come over the next few years and the company’s good track record of execution, I am optimistic about its prospects. Therefore, I have a buy rating on the stock.

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