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Why Is Jacobs Engineering (JEC) Down 11.9% Since Last Earnings Report?

It has been about a month since the last earnings report for Jacobs Engineering (JEC). Shares have lost about 11.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Jacobs Engineering due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Jacobs' (JEC) Q4 Earnings Beat Estimates, Revenues Miss

Jacobs Engineering Group Inc. reported fourth-quarter fiscal 2018 (ended Sep 28, 2018) results, wherein earnings surpassed the Zacks Consensus Estimate by 7.4% but revenues lagged the same by 2.5%.

The company's adjusted earnings in the reported quarter were $1.31 per share, increasing 34% from the year-ago figure of 98 cents. The upsurge was driven by accelerated CH2M cost savings along with strong operational execution.

Segmental Performance Drives Revenues

In the quarter under review, Jacobs' revenues totaled $4,142.6 million, reflecting healthy growth of 56% from the year-ago quarter (up 7% on a pro-forma basis). The improvement was driven by healthy segmental businesses.

Backlog at the end of fiscal 2018 was $27.3 billion, increasing 38% year over year.

The company reports revenues in three segments - Aerospace, Technology, Environmental and Nuclear; Buildings, Infrastructure and Advanced Facilities; and Energy, Chemicals and Resources. The segmental information is briefly discussed below:

Revenues from the Aerospace, Technology, Environmental and Nuclear segment were $1,299.1 million, increasing 100.3% year over year. It represented 31.4% of the total revenues in the reported quarter. Backlog at the end of the quarter was roughly $8.86 billion, up 39.3% year over year.

Revenues from the Buildings, Infrastructure and Advanced Facilities segment totaled $1,687.6 million, increasing 67.6% year over year. The segment accounted for 40.7% of its revenues in the quarter under review. Backlog at the end of the quarter was roughly $11.38 billion, up 67.6% year over year.

Revenues from the Energy, Chemicals and Resources segment totaled $1,155.9 million, increasing 15.8% year over year. The segment contributed 27.9% to the reported quarterly revenues. Backlog at the end of the quarter was roughly $7.07 billion, up 6.4% year over year.

Margins Profile

In the quarter under review, Jacobs' cost of contracts surged 53.8% year over year to $3,351.2 million and represented 80.9% of revenues compared with 82.1% in the year-ago quarter. Adjusted gross margin increased 130 bps year over year to 19.2%. Adjusted selling, general and administrative expenses flared up 56% year over year to $516 million and represented 12.5% of revenues, flat year over year.

Adjusted operating margin expanded 140 bps to 6.8% in the quarter.

Balance Sheet and Cash Flow

At fiscal 2018-end, Jacobs' cash and cash equivalents were $793.4 million, up from $774.2 million at the end of fiscal 2017. Long-term debt balance decreased to $2.15 billion from $2.35 billion at the end of fiscal 2017.

Fiscal 2018 Highlights

Adjusted earnings came in at $4.47 per share, reflecting an increase of 38% year over year. Revenues were $15 billion during the fiscal year, increasing 49.5% from fiscal 2017.

ECR Divestiture

On Oct 21, Jacobs agreed to offload its Energy, Chemicals and Resources ("ECR") business unit to Australia's WorleyParsons Ltd., as it intends to focus more on "highest-margin growth businesses".

The deal, which is expected to close in the first half of calendar 2019, is valued at $3.3 billion. Jacobs will receive $2.6 billion in cash and around $700 million worth of shares that equals to about 11% stake in WorleyParsons.

Fiscal 2019 View

Buoyed by stellar performance in fiscal 2018, Jacobs expects fiscal 2019 adjusted EBITDA between $920 million and $1 billion (excluding ECR).

The company expects fiscal 2019 adjusted EPS in the range of $5.00-$5.40 (assuming full-year ECR results). Consistent with its annual guidance, Jacobs expects adjusted EPS in the range of 85 cents to $1.15, including ECR, in the first quarter of fiscal 2019.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -9.2% due to these changes.

VGM Scores

Currently, Jacobs Engineering has a nice Growth Score of B, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of B on the value side, putting it in the second quintile for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, Jacobs Engineering has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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