Investor's Business Daily, July 6th, 2007
Economies around the globe are putting the pedal to the metal. Companies are flush with cash.
That money tends to burn a hole in the pocket, so businesses are launching capital spending projects. When they decide to build a big plant, pharmaceutical site, refinery or oil drilling rig, a lot of them are calling on Jacobs Engineering Group JEC to do it.
"It's the best market we've been in in 30 years," said Jacobs Chief Executive Craig Martin.
Jacobs cuts a wide swath in end markets that it serves. Oil and gas, chemicals, drug companies, bridge and highway construction, and government projects all are key parts of Jacobs' customer base. It's diverse enough that if one is down, another is probably up -- but that's not an issue now.
"All of their end markets are seeing robust growth across the board, for the first time that I can think of," said John Kearney, an analyst at Morningstar.
Sales for oil and gas, chemical and drug company projects all surged more than 30% last year. Sales to chemical and drug companies shot up more than 40% in the first half of this fiscal year.
Backlog Growing
Want a sure sign that orders are pouring in? Jacobs' backlog rose 18% in the March quarter, to $10.7 billion. That's the biggest catalyst for future growth, says Alex Rygiel, an analyst at Friedman Billings Ramsey.
Oil and gas makes up more than one-third of Jacobs' sales. Soaring oil prices in recent years have spurred a lot of oil company spending on huge projects, an area of expertise for Jacobs.
"It's a broader story than oil and gas, but oil and gas are definitely helping a lot," Rygiel said.
Take refining. That business is expected to spend $142 billion worldwide on capital projects in the next eight years, Martin says. Most are expansions to oil refinery capacity.
"There's nothing like $70 (a barrel) oil, and the cash flow that creates for our customers, to drive spending," Martin said.
Jacobs also does a lot of work for governments. A big growth area involves environmental cleanup.
The United Kingdom is about 15 years behind the U.S. in cleaning up federal sites, Martin says. That involves about $300 billion in contracts for top-level contractors.
"We see that as an enormous opportunity that's just getting started," he said.
The strength in chemicals is being fueled partly by those companies' desire to open plants in the Middle East, Martin says. That's become a region of strength for Jacobs, serving the oil and chemical industries.
Jacobs will likely make some acquisitions to further expand in the Middle East, Martin says. It's also looking to add capacity and skills in the oil and gas field.
Acquisitions have been a big part of Jacobs' growth over the years. It typically gets between one-third and one-fourth of its growth from newly acquired companies.
The opportunities are plenty. The engineering and construction market totals $4.3 trillion worldwide, Martin says. But no firm has as much as 1% of it.
"We can grow through acquisitions for at least the rest of my career," the 57-year-old Martin said.
Jacobs strives to operate locally for its customers. So rather than bring business back home, it puts people on the ground in Europe or the Middle East. That sets it apart from most rivals, Martin says.
It also controls costs well, says Kearney. That's a sign of how strong its management is.
"Jacobs is probably one of the best-managed firms in the space," he said.
That's reflected in its return on invested capital, which has topped its cost of capital in each of the past 10 years, Kearney says.
Its results show that strength. Fiscal second-quarter earnings jumped 49% to 55 cents a share. Sales rose 14% to $2.1 billion. Analysts polled by Thomson Financial expect earnings for fiscal 2007, which ends in September, to soar 39% to $2.23 per share and to gain 17% next year to $2.60.
Jacobs counts its business model as giving it a competitive edge.
It gets 75% to 80% of its business from long-term customer relationships. That's the flip side of the rest of the industry. Most rivals go after jobs piecemeal, focusing on bigger projects rather than repeat customers.
Small Jobs
But Jacobs will take a small job that repeats in good times and bad in order to get the big job later from the same customer.
"It works for them and it improves the predictability and consistency of their results," Rygiel said.
It also helps carry Jacobs through the industry's down cycles. The good times are rolling now, but that will end at some point.
"We're constantly worried about when this buoyant market will end," Martin said.
He doesn't see any signs of a quick reversal, but high oil prices are driving a lot of business. A shock to oil could slash spending in that industry.
That's where Jacobs' diverse base of loyal customers comes in.
Reliance on a small group of customers is a risk, Rygiel says. But while Jacobs gets 80% of its sales from about 50 customers, says Martin, those companies are in diverse markets.
And for now, the industry is in the catbird seat.
"There's probably more work out there than these guys can take on," Kearney said. "They can almost pick and choose their projects."
