Dec 12 Stock Pick - Jacobs Engineering Group

December 12 - Stock Selection Jacobs Engineering Group (JEC)

Although financial and banks stocks were weak in today's trading, the general market rebounded slightly from the disappointing Federal Reserve meeting on Tuesday. Due to the Fed response and Wall Street's luke-warm reception to the language issued looking forward into 2008, it is wise to look for stocks that are less dependent on both the U.S. economy and specifically reliant on large and rapid Fed rate cuts. My recommendation: Jacobs Engineering Group Inc. (JEC).


JEC is a construction and engineering firm based in the United States with projects underway around the world. Because a large portion of their revenue is outside of the U.S. the Federal Reserve and U.S. economy are not as heavy influence on JEC. There is a lot to like about this stock and its fundamentals and business, but that due to its P/E of 40 it is also a little bit of a momentum play. [disclosure - on Dec 6th I purchased January Call options on JEC at $90 strike price] Here are some positive notes on the company:

• Earnings have been steadily growing each quarter. Here are the last two years:
• Q1 2006: $0.36
• Q2 2006: $0.37
• Q3 2006: $0.42
• Q4 2006: $0.46
• Q1 2007: $0.51
• Q2 2007: $0.55
• Q3 2007: $0.61
• Q4 2007: $0.68
• Each of these quarters they have beaten earning estimates from Wall Street, usually by $0.03 - $0.04.
• The PE has been slowly expanding through 2007
• JEC's relative strength has been higher than its peers in recent weeks
• The stock held up nicely yesterday when the market was down big, showing strength, and bounced higher today - up 3.7%
• The stock is breaking into new highs after testing its 50-day moving average, showing technical strength
• Management is executing their operations well - sales increased from $7.5 billion to $8.5 billion in 2007 while increasing their gross margin this quarter (y/y) by 180 basis points - indicating they are not sacrificing margin to increase sales
• Management report in 4Q that their backlog of existing orders continues to expand - to $13.6 billion. This is a 23% increase in sequential quarters and a39% increase year over year.
• Analysts are continuing to raise their earnings estimates
• JEC offers an alternate choice to other current popular stocks in the segment such as Foster Wheeler

Overall, Jacobs Engineering is a steady performer whose predictable growth and strong order backlog, worldwide revenues, and relative strength make it a good buy at this level and on any pullbacks. The stock does sport a valuation higher than its peers, which although currently deserved does make the stock price susceptible to broad market corrections or if management should stumble. For these reasons, this is a holding that should be monitored closely for good entry points on pullbacks and for any heavy selling that would indicate a breakdown in its momentum.