Jacobs will continue to expand its critical mission solutions business

Business Strategy & Outlook

Since taking the helm in 2015, CEO Steve Demetriou has transformed Jacobs’ portfolio to increase recurring revenue and reduce cyclicality. In 2017, Jacobs acquired CH2M for $3.3 billion to bolster its presence in the transportation, water, nuclear, and environmental services end markets. In April 2019, Jacobs completed the sale of its energy, chemicals, and resources (ECR) business to WorleyParsons for $3.3 billion. Jacobs operates three business segments: critical mission solutions, people & places solutions, and PA Consulting.

Jacobs’ portfolio transformation favorably. As the ECR segment had high exposure to volatile oil and gas prices, and its operating margins have long lagged those of the firm’s other segments, the divestment will lower the risk and boost the margins of Jacobs’ portfolio. Furthermore, the strategic fit of the CH2M acquisition, as the deal has bolstered the firm’s nuclear business, allowing it to become a Tier 1 nuclear services provider, and increased Jacobs’ exposure to end markets that will benefit from favorable long-term trends, including water and transportation.

Jacobs will continue to expand its critical mission solutions business through strategic M&A, particularly focusing on opportunities that would allow the firm to enhance its capabilities in cybersecurity, IT, and predictive analytics. In the long-run, the company is poised to capitalize on multiple favorable secular drivers, including infrastructure modernization, space exploration, intelligence analytics, energy transition, supply-chain investments (particularly in the semiconductor and life sciences end markets), and the 5G buildout. Jacobs is well-positioned to benefit from the $1.2 trillion infrastructure bill in the U.S., given the firm’s strong position in areas such as water and transportation infrastructure.

Financial Strengths

Jacobs maintains a sound capital structure. As of December 2021, the firm owed approximately $3.1 billion in long-term debt, while holding roughly $1.2 billion in cash and cash equivalents. The company will have a debt/adjusted EBITDA ratio of roughly 2 times in fiscal 2022. At the recent Investor Day, management indicated that it would be willing to increase the leverage ratio up to around 3 times to fund M&A but would generally reduce leverage following any potential acquisitions. Jacobs’ financial health is satisfactory, considering the firm’s ability to generate cash flows throughout the business cycle.

Bulls Say

Management has shifted Jacobs’ portfolio toward sectors with favorable long-term prospects, including transportation and water.

The sale of the ECR business to WorleyParsons should reduce the risk of Jacobs’ remaining portfolio by lowering its exposure to volatile oil and commodity prices. Additionally, following the divestment, roughly two thirds of the remaining segments’ revenue is recurring.

The operating margins to expand due to synergies from the CH2M acquisition, SG&A cost reductions, and favorable mix shift.

Company Description

Jacobs Engineering is a global provider of engineering, design, procurement, construction, and maintenance services as well as cyber engineering and security solutions. The firm serves industrial, commercial, and government clients in a wide variety of sectors, including water, transportation, healthcare, technology, and chemicals. Jacobs Engineering employs approximately 55,000 workers. The company generated $14.1 billion in revenue and $1.2 billion in adjusted operating income in fiscal 2021.

(Source: Morningstar)

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