Dip In Jacob Engineering Shares Improves Risk-Reward, Baird Says In Upgrade

Jacobs Engineering Group Inc JEC shares have been on a downward trend since late January and are lower by 12.3 percent year-to-date, and a Baird analyst sees an opportunity in the dip. 

The Analyst

Baird analyst Andrew Wittmann upgraded shares of Jacob Engineering from Neutral to Outperform and lowered the price target from $75 to $70.

The Thesis

Jacobs Engineering's recent weakness significantly improves the risk-reward ratio for the stock and compensates for Baird's caution around CH2M integration, weak second-quarter forecast and projections for tail risk surrounding the Inpex power project, Wittmann said in a Monday note.

Jacobs Engineering offers exposure to improving, high-margin end markets in infrastructure and federal sectors, which account for half of the company's revenue, the analyst said. Jacobs has "cyclical opportunity" in energy and mining, he said.  

The company's backlog has steadily improved thanks to recent Department of Defense contract wins, helping to drive positive inflection in organic revenue for the first time in years, Wittmann said. 

The $3.3-billion purchase of the CH2M business is a better cultural fit and comes at a better time in the engineering and construction cycle, according to Baird.

The acquisition should assist Jacobs Engineering's margi improvement story, Wittmann said. 

"Net, with end markets showing inflecting growth, improved federal spending visibility (omnibus was a solid positive) and a normalized FCF yield approaching 10 percent, we see enough positives to justify our Outperform rating." 

The Price Action

Jacobs Engineering shares were up 2.66 percent Monday afternoon at the time of publication. 

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