Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
For that, you can thank the friendly analysts at Seaport Global Securities, who this morning announced they're starting coverage of the engineering and construction services firm. Initiating Jacobs stock with a buy rating and a $91 price target, Seaport is promising new Jacobs investors as much as a 22% profit, on top of the shares' 0.8% dividend yield.
Here's what you need to know.
What is Jacobs Engineering?
It's been a while since we last wrote about Jacobs Engineering here at The Motley Fool, so a brief refresher course may be in order. Valued at $10.4 billion and with $13.5 billion in annual sales, Jacobs Engineering is one of the larger engineering firms trading on U.S. public markets today. Rival AECOM, for example, is both bigger ($20.2 billion in sales) and smaller ($5.1 billion in market cap).
Jacobs divides its business among four main segments, each shown to be of roughly equal size in data drawn from S&P Global Market Intelligence: Aerospace and technology, buildings and infrastructure, petroleum and chemicals, and industrial -- so as you can see, it's a company deeply devoted to heavy construction projects.
All four of Jacobs' main businesses are profitable, with the greatest profits coming from aerospace and technology (which earns an 8.6% operating profit margin) and buildings and infrastructure (7.9% margin). Both divisions do roughly $2.4 billion in annual business.
Jacobs climbs the ladder
Jacobs Engineering stock has risen 28% in price over the past year, and for good reason. Last quarter's tremendous earnings report showed Jacobs growing its sales 65% year over year, and growing its earnings an even better 69%. (The company's next report, for its fourth and final quarter of the fiscal year, is due out next week -- on Tuesday, Nov. 20.)
Over the past 12 months, Jacobs Engineering has reported $295 million in net income from its four businesses combined, and generated superior free cash flow of $355 million. Thus, for every $1 in net income that Jacobs reports, it tends to generate about $1.20 in actual cash profit.
And with so much cash coming in the door, Jacobs sports surprisingly modest debt levels for a heavy industrial stock -- just $1.5 billion net of cash on hand. (For comparison, AECOM carries nearly twice the debt load -- $2.7 billion -- on a market capitalization less than half the size of Jacobs'.)
Why Seaport Global likes it
Now that you know what Jacobs Engineering is, and how well it does what it does, it's probably not too surprising to hear that Seaport Global likes it. What is surprising is why Seaport likes Jacobs Engineering.
In a note on TheFly.com explaining the analyst's reasoning, it's not just Jacobs Engineering's "well positioned ... infrastructure portfolio" that attracts Seaport Global to the stock. Even with all the profits and cash that Jacobs is generating from this portfolio of projects, the stock still trades for a rather pricey 36 times trailing earnings, with a 30 times free cash flow valuation that's honestly not a whole lot cheaper-looking.
Rather, Seaport is making a bet that Jacobs' future could be a whole lot brighter than everyone else on Wall Street currently thinks. Surveying the political landscape in the wake of the U.S. midterm elections, Seaport says it sees a possibility that one thing a Democratic House of Representatives might agree on with a Republican Senate and a Trump White House is...reviving the president's much-talked about $1 trillion infrastructure program.
Do you remember the infrastructure program? Back when Trump was first elected, there was a lot of talk about how the former construction magnate was interested in rebuilding America's highways, bridges, and airports with $1 trillion in new spending -- right after he got his Supreme Court picks confirmed, and right after he got tax reform passed through Congress. Well, both those boxes have now been ticked, and this could leave the way open for Trump to begin moving forward on an infrastructure-and-jobs program in 2019 that could appeal to both sides of the aisle in Congress.
The upshot for investors
Admittedly, hopes have been raised (and dashed) regarding this infrastructure program before. There's no certainty this time will be any different. Still, with Wall Street currently predicting only about 6% annualized profit growth for Jacobs going forward, there's a chance a new infrastructure program benefiting construction firms could goose Jacobs' growth rate, and create "a call option" on the stock.
This is what Seaport Global is betting on, and this is why it's recommending Jacobs Engineering stock.