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Bennett Meier

JEC AT A GLANCE

P/E ► 12.3 AVG EV/EBITDA ► 8.67 AVG ROA ► 10.4% HIGH ROE ► 17.9% AVG Debt to Equity ► 0.693 LOW Current Ratio ► 2.03 AVG Interest Coverage Ratio ► 172 HIGH

 

 

 

 

 

 

Jacobs Engineering Group (NYSE: JEC) designs and builds refineries, pharmaceutical manufacturing and chemical plants and other types of technically sophisticated facilities for its clients. For instance, the company is responsible for designing all aspects (Power/steam generation, underground infrastructure, and tank farm) of a bitumen-collection facility in the oil sands of Fort Hill, Canada. In addition to facility design, the company provides both engineering and consulting services. In its role as NASA's primary services support contractor, the company helps design, test, and analyze space-and aircraft components. JEC provided nearly $9 Billion worth of engineering, design, and construction services to government and industrial clients in 2007.

Rising demand for oil has benefited the company in over the last few years. Although the company serves a number of different industries, the services that it provides to refiners and oil exploration and production companies, namely helping them to expand existing refineries and/or extract more oil from existing wells, generated just under half of the company's revenue in 2007. As oil prices have risen, demand for JEC's services has also increased. The company's energy and refining revenues grew 11.71%. in 2007.^[1]

JEC follows a relationship-based business model: 80% of its 2007 business came from 30-40 core customers, many of whom the company has been serving for upwards of 50 years.^[2] 90% of all work that the company performs comes from repeat customers,^[3] including over 16% from US Government agencies.^[4] (By comparison, CH2M Hill, a close competitor in most of Jacobs' markets performed services for over 150 clients in 2007 with 28% of total revenue coming from US federal government projects.)^[5] Jacobs' close relationships with its clients lets it keep prices low by reducing the search and marketing costs typically associated with contract-driven industries.

Business and Financials

Income Statement for FY 2005-2007

(in Millions)

Jacobs divides the services that it offers into four broad categories:

• Project Services (45% of total revenue) provides design, engineering, and architecture services for the construction of new manufacturing plants, buildings, roads, bridges, and other infrastructure projects.
• Process, Scientific and Systems Consulting (7% of total revenue) offers consulting services on a broad scope of technical endeavors including financial feasibility studies, plant process efficiency studies, bio-containment strategies, and development of protocols in compliance with government regulations.
• Construction (35% of total revenue) is comprised of traditional field construction services. Jacobs specializes in modular construction techniques in which large panels are engineered and pre-fabricated and then transported to the construction site for assembly.
• Operations and Maintenance (O&M) (13% of total revenue) manages large industrial facilities on behalf of clients. Services include management of processes and sub-contractors, technical and engineering support, and facility maintenance.

For any given contract, however, the company can deliver services from two or more of these business categories.

Revenue Breakdown By Service Categories

(in Millions)

Unlike many of its larger competitors, Jacobs continues to focus most of its efforts on North America and Europe catering to its long-time clients instead of looking for new customers on the global stage. This is reflected by the fact that only 4% of the company's 2007 revenues came from sources other than Canada, Europe and the U.S.^[8] For Jacobs, international expansion is simply a means to meet the needs of its existing clients as they grow into new geographic territories. ^[9]

Revenue by Geographic Area

(in Millions)

Trends and Forces

High Price of Crude Oil and Gas Drives Increased Business

In 2007, a full 40% of Jacobs' total revenues came from services performed for the Oil and Gas industries. These sectors have been a consistent source of growth for the company.^[11] In 2007, the company's revenues from the energy and refining sector grew 11.71% as refiners walked a narrow line between construction to meet increased demand and the margin squeeze brought on by high crude prices. Downstream revenue growth paled in comparison, however, to the 63% posted by Jacobs in the Upstream market, mostly due to investment in production facilities capitalizing on the rapidly climbing oil prices of 2007.^[12] With so much of Jacobs' operations tied up with the oil industry, high crude prices (and the continued investment from the oil industry that they encourage) will translate into high revenue growth for the company.

US Government Spending Impacts JEC less than competitors

Contracts with the United States government--principally through the Department of Defense (DOD), the Department of Energy (DOE), and the Department of Transportation (DOT)--accounted for 16.6% of Jacobs' total revenues in 2007.^[13] While this exposure is less than some of Jacobs' competitors it still represents a significant portion of the company's total yearly services and puts the company at risk of volatility in government spending. The US budget varies heavily from year to year depending on tax revenues, the party in power, military realities, and public's perception of the social worth of any given project. This volatility has the potential to impact Jacob's future revenues, either through adjustments in the number of new contracts awarded or the extent to which old contracts are completely funded and expanded upon. The DOD's Research, Development, Test and Evaluation budget (out of which comes much of the funding for Jacobs-supported projects) is slated to increase by 0.85% in 2008 to $76.54 billion and then to $79.62 billion in 2009, an increase of 4%. ^[14] Additionally, the DOT will see its budget increased by 5% in 2008 (to $69.25 Bil.) and then cut in 2009 by 8.4%. ^[15] Note: These numbers are subject to revision and approval by the US Congress.

The Continued Profitability of Name-Brand Prescription Drugs Essential for Jacobs' Pharmaceutical Projects

While Jacobs' relatively small client base can be beneficial, it can also prove troublesome in shifting markets. This would quickly become apparent in the company's projects for the Pharmaceutical industry if new name-brand prescription drugs lost their traditional profitability. Through the 2000's the price of prescription drugs has been rising steadily, prompting many politicians to consider measures limiting prices or shortening the length of patent protection on these drugs. Any measure of this type would inevitably reduce the profitability of new drugs coming to market, and this would have a dampening effect on development and production efforts on the part of the name-brand drug manufacturers. In 2007, Jacobs received nearly 10% of total revenues from projects for the Pharmaceutical and Biotechnology industries for services ranging from construction of new labs and plants to maintenance of production facilities.^[16] Any spending cuts on these types of projects would have a significant negative impact on Jacobs' earnings. While government price-capping actions would have a positive effect on the generic drug market, Jacobs' ties to the major manufacturers would prevent it from quickly capitalizing on this growth.

Competition

Competitors by Primary Service Market

Jacobs breaks its competitive markets down into four categories: a broad market: Engineering, Construction, and Maintenance (ECM); and then more specific Buildings; Infrastructure; and U.S. Federal Programs.

• The company competes for ECM business with Bechtel Corp, Fluor (FLR), Foster Wheeler (FWLT), URS (URS), KBR (KBR), Aker Kvaerner, Technip (TKP), WorleyParsons (WYGPF) and AMEC plc (AMEC), The Shaw Group, SAIC (SAI) , CH2M Hill, Weston Solutions.
• Jacobs' primary competition in the Buildings category comes from the architecture firm Aecom Technology (ACM), and Turner Construction as well as from many of the companies listed above.
• In the Infrastructure Sector, Jacobs faces Parsons Brinckerhoff, HNTB, Tetra Tech (TTEK), Parsons Corp. and W.S. Atkins (as well as many of the already mentioned companies.)
• Jacobs competes primarily for U.S. Federal Program contracts with Lockheed Martin (LMT), and Computer Sciences Corp. along with many of the companies already mentioned.

Metrics

In addition to total revenue, work backlog serves as a useful metric by which to judge a company's performance. Backlog represents the value of services contracted but not yet performed within the reporting year. While backlog does not provide a consistent measure of health between industries (as accepted business models and styles of contracting vary), it does serve as a useful tool in discerning how secure a company's revenue stream will be in the coming years compared to its neighbors in the same sector.

*Note on the Table: N/A stands for not available. Many privately owned companies do not publish income data to the general public.

References

1. ↑ JEC, 2007 10-K
2. ↑ Morningstar Report: JEC, 10/6/2007
3. ↑ | JEC, Corporate Profile
4. ↑ | JEC, 2007 10-K Report, Item 1: Business, pp. 16
5. ↑ | CH2M Hill, 2007 10-K, Item 1: Business, pp. 5
6. ↑ | JEC, 2007 10-K Report, Consolidated Statements of Earnings, F-4
7. ↑ | JEC, 2007 10-K Report, Item 1: Business, pp 5
8. ↑ | JEC, 2007 10-K Report, Note 15: Segment information, F-27
9. ↑ | JEC, 2007 10-K Report, Item 1: Business, pp. 5
10. ↑ JEC, 2007 10-K Report, Note 15: Segment information, F-27
11. ↑ | JEC, 2007 10-K Report, Item 7: Management's Discussion and Analysis, pp. 34
12. ↑ | JEC, 2007 10-K Report, Item 7: Management's Discussion and Analysis, pp. 34
13. ↑ | JEC, 2007 10-K Report, Item 1: Business, pp. 16
14. ↑ | US Budget Report, FY 2009, Department of Defense, pp. 49
15. ↑ | US Budget Report, FY 2009, Department of Transportation, pp. 100
16. ↑ | JEC, 2007 10-K Report, Item 1: Business, pp. 9
17. ↑ | JEC, 2007 10-K Report, Item 7: Management's Discussion and Analysis, pp. 20
18. ↑ | Google Finance: ACM, Annual Income Statement
19. ↑ | ACM, 2007 10-K Report, Item 1: Business, pp. 8
20. ↑ | AMEC, FY 2007 Annual Report, pp. 78
21. ↑ | Bechtel, 2007 Corporate Fact Sheet
22. ↑ | CH2M Hill, 2007 Corporate Report, pp. 9
23. ↑ | CH2M Hill, 2007 10-K, Item 1: Business, pp. 9
24. ↑ | Google Finance:CSC, Annual Income Statement
25. ↑ | CSC, 2007 10-K Report, Item 1: Business, pp. 16
26. ↑ | Google Finance: FLR, Annual Income Statement
27. ↑ | FLR, 2007 10-K Report, Item 1: Business, pp.7
28. ↑ | Google Finance: FWLT, Annual Income Statement
29. ↑ | FWLT, 2007 10-K Report, Item 7: Management's Discussion and Analysis, pp. 44
30. ↑ | Google Finance: KBR, Annual Income Report
31. ↑ | KBR, 2007 10-K Report, Item 1: Business, pp. 11
32. ↑ | Google Finance: LMT, Annual Income Statement
33. ↑ | LMT, 2007 10-K Report, Item 1: Business, pp. 16
34. ↑ | Parsons, 2007 Fact Sheet
35. ↑ | Google Finance: SAI, Annual Income Statement
36. ↑ | SAI, 2008 10-K Report, Item 1: Business, pp. 3
37. ↑ | Google Finance: SGR, Annual Income Statement
38. ↑ | SGR, 2007 10-K Report, Item 1: Business, pp. 3
39. ↑ | Technip, FY 2007 Annual Report, pp. 3
40. ↑ | Technip, 2007 Annual Report, pp. 12
41. ↑ | Google Finance: TTEK, Annual Income Statement
42. ↑ | TTEK, 2007 10-K Report, Item 1: Business, pp. 15
43. ↑ | Google Finance: URS, Annual Income Statement
44. ↑ | URS, 2007 10-K Report, Item 1: Business, pp. 13
45. ↑ | WorleyParsons, 2007 Annual Report, pp. 2
46. ↑ | WATKF, 2007 Annual Report, pp. 2
47. ↑ | WATKF, 2007 Annual Report, pp. 9