Jacobs Solutions Inc.
A world class Engineering and Construction company transforming for the next leap.
With the world enthralled with the “pie in the sky” promises of Artificial Intelligence (AI) and chasing any company that even mentions AI in any shape or form, I have stayed away from the mania. Having spoken to many friends, experts, and my AI college professor, I concluded that going from LLM to AGI can be done. But, the earth doesn’t have enough electricity to power projected solutions. Be that as it may, I am not here to debate the AI ecosystem, I am here today to look at an exciting Engineering and Construction company. Going with this blog’s theme of focusing on finding slow and steady compounders, I present to you Jacobs Solutions Inc.
Jacobs Solutions Inc. (NYSE: J) describes itself as such:
At Jacobs, we’re challenging today to reinvent tomorrow by solving the world’s most critical problems for thriving cities, resilient environments, mission-critical outcomes, operational advancement, scientific discovery and cutting-edge manufacturing, turning abstract ideas into realities that transform the world for good. Leveraging a talent force of approximately 60,000, Jacobs provides a full spectrum of professional services including consulting, technical, engineering, scientific and project delivery for the government and private sector.
So, what made me like Jacobs?
Jacobs continues to play a big role in President Biden’s Infrastructure Investment and Jobs Act (IIJA) passed in 2021. The Act budgeted a total outlay of $1.2 trillion to improve the country’s infrastructure by 2025. $853 billion remains to be spent. Jacobs is expected to get a decent share of the pie.
In the fields Jacobs provides services it’s either ranked number one or number two but mostly number one.
It has a worldwide presence. For instance, Jacobs was the program manager for the Qatar FIFA World Cup and the Dubai Expo.
Jacobs is in the middle of restructuring to become a pure-play infrastructure player. This whole restructuring will also create a pure-play government services company. Jacobs’ shareholders will own 63% of the newly listed entity. More on this later.
And who wouldn’t get excited by its historical share price performance versus the S&P500?
So, now let’s take a look at Jacobs’ business. The best way to do that is to look at its operating segments. The information about its operating segments is from its Q1 2024 10Q filed with the SEC. (Sometimes it is best not to reinvent the wheel.)
Critical Mission Solutions (CMS)
Jacobs' Critical Mission Solutions line of business provides a full spectrum of solutions for clients to address evolving challenges like information and cyber warfare, digital transformation and modernization, national security and defense, space exploration, digital asset management and the green energy transition. Our core capabilities include program management and mission operations; systems digital engineering and mission integration, research, development, test and evaluation; integration, operation, maintenance and sustainment of systems and facilities; enterprise-level IT operations and mission IT delivery, software development, and software application integration; engineering, design and construction of specialized technical facilities and systems; environmental remediation; specialized training; robotics and automation; and other highly technical consulting solutions. We deliver these capabilities for government agencies as well as commercial clients in the U.S. and international markets.
We leverage our deep experience to support clients in the Aerospace, Automotive, Space, Telecom, Intel, Defense and Energy sectors to develop lasting solutions in the communities where we live and work.
CMS is included as part of the Separation Transaction announced on November 20, 2023, which is expected to close in fiscal year 2024, subject to regulatory approvals and other customary closing conditions.
People & Places Solutions (P&PS)
Jacobs' People & Places Solutions line of business provides end-to-end solutions for our clients’ most complex challenges related to climate change, energy transition, connected mobility, integrated water management, smart cities and biopharmaceutical manufacturing. In doing so, we combine deep experience in the following markets - Infrastructure, Cities & Places, Energy & Environmental, Health & Life Sciences and Advanced Manufacturing. Our core capabilities revolve around consulting, planning, science, architecture, design and engineering, as well as infrastructure delivery services and long-term operation of facilities. Solutions may be delivered as standalone professional service engagements, comprehensive program management partnerships, and selective progressive design-build and construction management at-risk delivery services in targeted markets. Increasingly, we leverage our data science and technology-enabled expertise with our core capabilities to deliver positive and enduring solutions for the clients and communities we serve.
Our clients include national, state and local governments in the U.S., Europe, U.K., Middle East and Asia-Pacific, as well as multinational and local private sector clients throughout the world.
Divergent Solutions (DVS)
Jacobs’ operating segment, Divergent Solutions, serves as the core foundation for developing and delivering innovative, next-generation cloud, cyber, data and digital technologies. DVS further strengthens our ability to drive value for clients of both LOBs by leveraging a full spectrum of cyber, data analytics, systems and software application integration services across Jacobs. Our core capabilities include global strategic alliances, innovation collaboration, next-generation technologies, software and data as a service and data and secure solutions. DVS clients include government agencies and commercial clients in the U.S. and international markets.
The Separation Transaction announced on November 20, 2023 includes portions of DVS, including its Cyber & Intelligence business.
PA Consulting
Jacobs invested in a 65% stake in PA Consulting, the company that is bringing ingenuity to life. PA accelerates new growth ideas from concept, through design and development and to commercial success, and revitalizes organizations, building leadership, culture, systems and processes to make innovation a reality. PA Consulting's global team of approximately 4,000, which includes strategists, innovators, designers, consultants, digital experts, scientists, engineers and technologists work across seven sectors: consumer and manufacturing, defense and security, energy and utilities, financial services, government, health and life sciences, and transport to make a positive impact alongside the clients it supports.
PA has a diverse mix of private and public sector clients. Private sector clients include global household names like Unilever and Pret A Manger; and start-ups like PulPac, which is converting plant fibers into sustainable packaging, and Hydrow, with its award-winning indoor rowing machine. Public sector clients include national and local government entities like the U.K.’s Ministry of Defence and National Health Service, the Swedish Payments Authority (Utbetalningsmyndigheten), and the U.K.’s Hampshire County Council.
In a fast-moving, complex world, we’re deploying the collective strengths of Jacobs and PA to create significant opportunities for our clients to adapt, innovate and transform. Alongside Copenhagen Metro – one of the most advanced public transport systems in Europe – we’re providing strategic management and technical services to support its operations and maintenance. We’ve also been selected by the U.K. Department for Transport to provide technical and commercial advice on its portfolio of rail and other transport mode agreements, major projects and programs, and its policy and strategic work in transport.
High-Level Financials
Let’s look at the recent financial performance of Jacobs using some high-level numbers and see if we can discover any issues or pain points.
Annual Income Statement and Cash Flow Statement
Straight out of the bat, we can infer that the “Cost of Goods Sold” is high for Jacobs. Also, its “SG&A Expenses” and “Other Operating Expenses” are putting rather high pressure on its operating income. These are not red flags as this is very common in infrastructure businesses. The key thing to look for is that there is incremental growth. On that front, Jacobs has done quite a good job.
Despite a little hiccup in 2022, well who was not having hiccups that year, it is steady as she goes for Jacobs. Jacobs’ “Cash Flow to Debt Ratio” is 0.3 which suggests that Jacob can pay off its debt using its cash flow (operating) in 40 months. Essentially, there are no signs of stress.
Recently Quarterly Performance
This is concerning as there has hardly been any growth in the immediate recent times. One can only hope that new orders from the IIJA will help propel its near-term performance. This explains the recent volatility in the stock.
Valuations
Many swear by DCF (Discounted Cash Flow). Sorry, I am not smart enough to look into the future and predict a company’s future cash flows. Basic rule: Keep it simple. Another thing, when somebody talks to you about EBITDA, just turn around and walk away. Why? Well, Charlie Munger once said, “EBITDA is BS earnings.”
That out of the way. The starting point for me is the PEG (Price-to-Earnings-to-Growth). If it is below 3, OK, but if it is below 2, great. The PEG for Jacobs is 1.45. So we are covered on that.
Next, I look at EBIT/EV. If this metric is above the current 10-year bond yield, we have a winner. (I learned this from Joel Greenblatt). For Jacobs EBIT/EV is 5.58%, which is higher than 4.2%, the current 10-year bond yield.
Nothing more fancy to do, we have solid fundamental drivers, a strong balance sheet, and the company is fairly valued. Now, the question becomes, “When to buy?”. For that I use technicals. In this case, I will dispense with that as there is a restructuring in progress that is expected to be completed in the second half of the year.
Strategic Restructuring
Jacobs announced on November 20, 2023, that it intends to spin off its CMS and C&I (part of DVS) businesses and merge them with Amentum. Amentum is currently a privately held company. Once the transaction is completed, the new entity will become a listed entity and Jacobs’ shareholders will own 63% of the new entity. Also, Jacobs will receive a $1.0 billion cash dividend at closing which it intends to use to reduce its debt.
The goal, as stated earlier, is to make Jacobs a pure-play infrastructure company and the new entity a pure-play government services leader. The transaction will make Jacobs’ portfolio more focused and improve its margin profile.
Conclusion
We have found Jacobs to be a world-class company with solid fundamentals, and financials, and has enough future fundamental triggers for it to succeed. The strategic restructuring is expected to make Jacobs stronger. As usual, it is up to you to decide when and if to invest. Finally, please share with your connections. Also if you are a new reader, please subscribe and help this blog.