Jacobs Engineering Group Inc. (JEC) has won engineering contracts from the United States Government (USG), Department of State (DOS), Bureau of Overseas Buildings Operations (OBO), and Porton Fine Chemicals Ltd (Porton), China-based custom manufacturing organization.
The U.S. government contract is of $25 million for a year with an option to extend it to another four years. The other contact value has not been disclosed, but Jacobs will provide engineering services for a new multi-purpose GMP manufacturing facility at Chongqing Changshou Chemical Industrial Park, in China.
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 will help it to emerge stronger.
Jacobs’ robust liquidity position with a net cash position of $847.6 million at the end of the third quarter of fiscal 2010 will hold good in future.
However, we remain Underperform on the stock based on the company’s continuous decrease in backlog since the beginning of fiscal 2010, which is expected to negatively affect its top-line results in fiscal 2011. Hence, we reduce our fiscal 2011 estimate.
The stock is cyclical in nature and thus, the sluggish economic environment, which has reduced the spending power of clients, was the prime reason for the decrease in backlog. Large investors fear to infuse capital in these unstable market conditions. Moreover, the company faces immense risk as it operates in a highly-competitive environment. The stock retains its Zacks #4 Rank (short-term Sell rating).
