Jacobs Engineering Group Inc. (J: NYSE, Not Rated) released its FQ1/20 results this morning, posting strong results that resonate with AECOM (ACM: NYSE, Not Rated) and Tetra Tech Inc. (TTEK: NASDAQ, Not Rated) results. Revenue, adjusted EBITDA and adjusted EPS for the quarter came in at US$3.4 bln, US$260 mln, US$1.20, respectively; above Street consensus at US$3.3 bln, US$254.1 mln, US$1.18. Importantly, the company maintained its guidance for FY2020; reiterating adjusted EBITDA target of US$1.050 bln - 1.150 bln (US$1.1 bln midpoint) and adjusted EPS target of US$5.30 - 5.80 (US$5.55 midpoint), both in line within Street estimates of US$1.1 bln and US$5.55, respectively. In addition, the company remains on track to deliver US$450 mln in free cash flow in F2020 (DSOs improving in the first quarter is a healthy sign; note that Q1 is also a seasonally weaker quarter re. collections). Please note, however, the number includes US$150 mln net impact from restructuring charges hence the clean run rate should be in the US$600 mln range, representing 55% of the expected EBITDA generation in line with what we are expecting for WSP and STN at 54% and 55% in 2020E. Management also increased share repurchase authorization to a total of US$1.4 bln; implying an incremental US$1.0 bln to be deployed towards buybacks.

On a similar tune to U.S. peers (recall that backlog for ACM / TTEK increased by 2% and 13% in the most recent quarter y/y), backlog jumped 6% y/y on a pro-forma basis to $22.7 bln signaling strong demand in the U.S. Federal and infrastructure space. On a by-division basis, Backlog in Critical Mission Solutions (90% U.S.-based) / People & Places Solutions (64% U.S.-based) increased by 4% (to US$8.5 bln) / 8% to (US$14.2 bln), respectively, on pro-forma basis.

In terms of end-markets positioning, recall that JEC previously telegraphed continued focus in higher-margin sectors that are exhibiting strong secular growth; namely water, environmental, cybersecurity, etc. On the People & Places side (consulting-type business line akin to the likes of WSP, STN, Atkins - SNC), net revenue breakdown stands at 19% / 21% / 10% / 32% / 17% for Water / Built Environment / Environmental / Transportation / Advanced Facilities in the quarter. In addition, recall the company is also expanding into the nuclear space with the takeover of Wood Nuclear (see our thoughts Here); the acquisition remains on track and management expects the deal to close by March 2020.

Refresher on newly introduced reporting structure. Please recall that in FQ4/19, the company announced new names for the two existing business lines – Critical Mission Solutions (former Aerospace, Technology and Nuclear), and People & Places Solutions (formerly Buildings, Infrastructure and Advanced Facilities) while changing its ticker to J (from JEC) to highlight the renewed business focus. Below we present conference call takeaways in terms of the business prospects within the two divisions.

• Critical Mission Solutions (CMS) – The division houses 15,000 employees and is one of the largest government services providers in the United States (current backlog is sitting at US$8.5 bln; up 4% y/y). In terms of geographical split, the U.S. and International stand at 90% and 10%, respectively. The unit also enjoys sticky revenue generation as roughly 90% of top line is recurring according to the company’s disclosure. Management believes the division is well-positioned for strong secular growth due to healthy demand in U.S. federal sectors and higher-growth opportunities such as cybersecurity, space intelligence, nuclear remediation and 5G infrastructure. Notable recent awards include the design and development of next-generation testing equipment for air launch and underwater testing of hypersonic weapon systems at the Navy’s strike test facility. Overall, management believes the pipeline to be robust for the division (in fact it’s up 4x over the last 12 months).
• People & Places Solutions (PPS) - People & Places Solutions is 35,000 employees large with 64% in the U.S. and 36% International. The Public / Private sector split is 59% / 41%. The PPS backlog increased 8% to US$14.2 bln this quarter primarily on U.S. and UK contributions. The company has highlighted the PPS to be an opportunity-rich space in which the number of environment-focused projects is rising (Jacobs has a +50% win rate in this space). The company highlighted projects in infrastructure development, and climate change resiliency to be a key driver of growth here. Recent major awards include the Sydney Water Infrastructure, UK Government agency PFAS and the Middle East Autonomous Port Infrastructure Development Program.

M&A, capital deployment and competition thoughts on “another large scale” potential deal (read WSP/AECOM — see our thoughts on the subject Here). Given J’s expanding share buyback authorization to $1.4 bln (from $0.4 bln), the focus shifts somewhat inward but on the call, management did not exclude M&A (especially if it adds to the company’s digital consulting / innovation toolkit or becomes accretive from a geographical perspective). When asked directly about another potential large deal in the market, management felt that given integration timelines, the competitive landscape for its own services would remain intact.

Bottom line — the company’s pivot away from commodities towards de-risked government consulting and infra is paying material dividends. We continue to applaud J’s strategic positioning. With the shares up 42% on LTM basis (vs. S&P 500 +20%) and 11.8x 2020E EV/EBITDA (consensus), we are not saying anything new here. Thematically the company is very well positioned in key government (cyber, nuclear, infra) end markets while the private sector in data storage, healthcare and semis is likely to continue to spend. Company’s infra-related commentary is supportive of our views on WSP, STN and SNC business in the United States while the technology approach once again makes us think about IBI’s offering (architecture — vertical and horizontal infra and now importantly asset management, Smart City solution provider — > 20% of the company’s top line. It was also interesting to see as well the recent $120 mln investment into Miovision Technologies Inc., a traffic-signal-management platform — link here — highlighting in our view the significantly undervalued nature of IBG shares).

NBF does not currently provide coverage, a recommendation or opinion on Jacobs Engineering Group Inc. The information in this Research Flash is a compilation of publicly available information and is not to be construed otherwise.