It’s that time again, when many of the publicly traded A/E firms release their earnings reports. On Wall Street, public company earnings reports are often followed by a Greek chorus of commentary by industry analysts and pundits, and the stock market often reacts by rewarding strong performance and punishing lackluster results. This can be high drama for stockholders, directors and officers of these firms, but even small firm owners and managers can gain some valuable insights by following the action.
We decided to take a closer look at the performance of five A/E stocks—Tetra Tech (TTEK: Nasdaq), AECOM (ACM:NYSE), Jacobs Engineering (JEC:NYSE), Stantec (STN: NYSE), and URS Corporation (URS:NYSE). Together these firms employ over 175,000 people and generate approximately 22% of the total revenue of the ENR 500 and 10% of the total domestic A/E sector. With such a large share of the market, the financial performance and outlook of these firms, together with Wall Street’s reaction, can tell us quite a bit about the outlook for the overall industry.
Earnings, Earnings, Earnings
Tetra Tech posted quarter over quarter gains in revenue and earnings, with an increase in gross revenue of approximately 11% (compared to the same quarter of last year) and an increase in earnings before interest taxes depreciation and amortization expenses (EBITDA) of 16%.
Wall Street has reacted positively to Tetra Tech’s performance. The firm’s share price has increased steadily over the last eight months from a low of around $18.50/share in August of 2011 to its present level of $27/share.
According to the firm’s quarterly SEC filing (Form 10-Q) growth was led by the U.S. commercial markets, which were up 29.4% in the first half of fiscal 2012. Public sector growth was mixed, with Federal markets down 7.7% and state and local work up 12.4%. Management is guarded about the outlook for the U.S. federal government markets, stating in its quarterly SEC filing that “During periods of economic volatility, our U.S. federal government business has historically been the most stable and predictable. However, due to U.S. federal budget uncertainties, we remain cautious.” The firm expressed a slightly more optimistic outlook for state and local markets, remarking, “Although we anticipate that many state and local government agencies will continue to face economic challenges, we expect our U.S. state and local government business to experience strong growth in fiscal 2012 compared to fiscal 2011 because of our focus on essential programs.”
The increase in Tetra Tech’s stock price brings its enterprise value/EBITDA ratio to 7.9x. This is a strong, but not unreasonably high valuation multiple, indicating expectations for continued earnings growth.
Sometimes it’s all about expectations
AECOM stock fell to a just under $18/share following the release of its earnings report. The $4/share tumble in value is blamed on the firm missing analysts’ consensus forecast for the quarter by 2 cents per share, and management’s downward revision of its annual forecast from $2.45.share to $2.30/share. Curiously, Wall Street seemed unmoved by the Company’s 4% growth in gross revenue and record high level of contract backlog.
On its May 3rd earnings call, Chief Financial Officer Stephen Kadenacy noted that AECOM’s EBITDA margin declined to 7.9% (roughly 1 percentage point), driven mostly by a decline in its Management Support Services (MSS) division. The MSS division, which provides support services to the U.S. government operations in Iraq and Afghanistan, was impacted by the faster than expected draw-down of forces in Iraq.
Looking ahead, AECOM’s focus is on emerging and natural resource markets. The company hopes to capitalize on an anticipated $5 trillion in infrastructure spending in India and China over the next five years, as well as natural resource markets in Brazil, Australia and the African continent.
As for North American markets, CEO John Dionisio also appeared optimistic about private sector growth, noting significant capital expenditures in domestic natural resource markets (shale oil and gas markets in particular) as well as improving commercial construction activity. As for the public sector, Dionisio remarked that, “Although the United States public sector expenditures remain challenged, we have solid visibility with over $2 billion in backlog supporting our civil infrastructure business in the United States.” On the state and local level, Dionisio cited the example of Southern California Water District’s 5% rate increase as an example of the sort of dedicated funding sources expected to drive local capital projects.
The drop in AECOM stock price brings its enterprise value/EBITDA ratio to 6.3x, a slightly lower multiple compared to its peers. This could reflect concern over the firm’s growth prospects, or shaken confidence due to the downward revision in earnings forecasts. Either way, AECOM’s stock appears undervalued and is probably poised for a rebound.
Oil & gas markets buoy Jacobs’ stock
Jacobs Engineering also made a downward adjustment to its earnings guidance for fiscal year 2012, lowering the upper end of its earnings per share range from $3.20/share to $3.00/share. Jacobs’ posted growth in revenue and earnings for the 2nd quarter and year-to-date compared to the same periods of last year, but this did not keep its stock from falling as a result. Over the past three weeks, Jacobs’ stock has fallen from over $43/share to approximately $39/share.
During its investors call, Chief Financial Officer John Prosser cited a number of factors that contributed to the lower than expected margins in the 2nd quarter. These included competitive pressures on billing rates, and lower labor utilization caused by a high volume of new hires. At the same time, both Prosser and CEO Craig Martin pointed to positive forward indicators and growth prospects, including an 8% increase in Jacob’s contract backlog.
Martin acknowledged the increased competitiveness in the U.S. government sector as well as budget constraints, but stressed the strong position that Jacobs holds in the best funded areas of the government sector. “The national governments business, believe it or not, is actually improving from our perspective,” states Martin. “What’s happening in terms of the technical complexity of projects and this trend toward multi-award task order contracts, the so-called MATOCs, actually puts us in a position to expand our share of the market. We’re also very well positioned in the well-funded segments. Cyber security and IT, environmental management are all areas where we expect strong funding relative to the overall government markets going forward.”
The Company is particularly optimistic about upstream and downstream oil and gas markets that it serves, which make up approximately 28% of its revenue. The undeniable strength of these markets has likely insulated Jacobs from a more substantial hit to its stock value.
After the drop in its share price, Jacobs’ enterprise value-to-EBITDA ratio stood at 6.9x, somewhere in the middle of the range of the other publicly traded firms.
Organic growth and acquisitions drive Stantec forward
Stantec announced that its first quarter gross revenue increased by 7.4% to approximately $438 million USD. Its earnings also increased during the quarter, with EBITDA up 3% to approximately $47.3 million USD. Stantec’s share price has been on the rise since last September’s low of approximately $20/share. Following its earnings release, the firm’s shares were trading at approximately $30/share.
“We began 2012 on a positive note, and despite the continuing challenges of the business environment, we achieved a third consecutive quarter of organic growth” says Bob Gomes, Stantec president and chief executive officer.
Stantec’s organic growth has been augmented by a series of 15 or more acquisitions since the start of 2010, resulting in the addition of over 2,000 employees. These have ranged from small firms of 50 or fewer employees, to its 2010 acquisition of 600-person architecture firm Burt Hill. Just last month it announced the planned acquisitions of Baton Rouge-based ABMB Engineering, and Newfoundland-based architecture firm PHB Group.
Like the others, Stantec has seen its growth driven by the private sector. Gomes states, “Our results for Q1 12 were positively impacted by an increase in revenue due to organic growth in our Industrial and Urban Land practice areas, including strong activity in the mining and oil and gas sectors.”
The increase in Stantec’s share price over the last eight months brings its enterprise value-to-EBITDA ratio of approximately 8.0x.
URS expands its presence in North American oil & gas markets
URS reported this week that its gross revenue for the first quarter of 2012 increased approximately $40 million over the same period of 2011. Most of this increase went right to the bottom line, contributing to a $31.8 million increase in operating profit (a gain of 24%).
URS recently announced the acquisition of Flint Energy Services, a 10,000-person construction services firm serving oil & gas markets, including the Canadian oil sands. CEO Martin M. Koffel, stated: “We are looking forward to successfully completing our previously announced acquisition of Flint Energy Services, which will significantly expand our presence in the growing oil and gas sector, particularly in the North American unconventional oil and gas segments.”
The company reaffirmed its revenue and earnings guidance for 2012, indicating that revenue should be between $9.9 billion and $10.1 billion and net income should be between $292 and $300 million. These forecasts do not include growth in revenue and earnings resulting from the Flint Energy deal.
The company’s stock price has improved over the last six months, rebounding from a low of under $26/share in October of 2011 to its present level of approximately $40/share. However, this represents a relatively low enterprise value-to-EBITDA multiple of 5.2x based on the most recently reported 12 months earnings. The market may be taking a “wait and see” approach to the Flint Energy acquisition.
An interesting consensus appears to be emerging from these five players. Based on divisional performance trends and management’s commentary, it appears that public sector markets, particularly federal government markets may be beginning to wane, while certain segments of the private sector (oil & gas, manufacturing, industrial) are rebounding and are expected to drive growth for the remainder of 2012 and into 2013.
On the public sector side, those agencies with access to dedicated sources of funding are expected to continue to invest in capital improvements, while those dependent on state and/or federal funding will be most vulnerable to budget cuts and the present political stalemate. In balance, Wall Street seems to approve of the shift toward private-sector driven growth, with valuation multiples pointing to a continued recovery for the industry.
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