CORPORATE FOCUS—Engineering Firm Benefits From Stream of Big Deals

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Getting to know its major customers has resulted in a big payoff for Jacobs Engineering Group Inc.

In recent months, the stock of the Pasadena-based engineering and construction services company has been on a roll, ever since it began winning a slew of new contracts worth hundreds of millions of dollars.

“They’ve had a good run,” said Stewart Scharf, equity analyst at Standard & Poor’s. “Their fundamentals have been strong and they’re focusing on preferred relationships, which is driving profits.”

Jacobs enjoys long-term business relationships with such giants as drug maker Merck & Co. and oil company BP Amoco.

Since hitting a 52-week low of $26.94 a share on March 14, Jacobs’ stock has been on an upward tear, topping out at $44.19 on Nov. 6 and dropping back only slightly since then. It closed at $43.25 on Dec. 6.

John Prosser, senior vice president of finance and administration at Jacobs, said the March nadir in the stock price came at a time when Jacobs paid $38 million to settle a whistleblower suit with the U.S. Department of Justice.

That hit was reflected in the financial results for the fiscal year ended Sept. 30, for which Jacobs reported net income of $51 million ($1.93 per diluted share), down from net income of $65.4 million ($2.54 per share) in fiscal 1999. Revenue was $3.4 billion vs. $2.9 billion.

For the fourth quarter ended Sept. 30, Jacobs reported net income of $19.6 million (73 cents per diluted share), compared with net income of $17.4 million (65 cents) for the same period a year earlier. Fourth-quarter revenue was $870.2 million vs. $768.1 million.

One key to Jacobs’ success, according to Prosser, has been the diversity of its business. “We are a provider of professional technical services to a lot of industries,” he said. “The industries we serve are showing positive growth.”

Evidence of that can be found in the firm’s backlog of projects. Prosser said that total now stands at a record high $5.4 billion, having grown from $3.3 billion at the end of fiscal 1998 and $4.4 billion at the end of fiscal 1999.

Recent contracts won by Jacobs include a $600 million deal to design and build an American Home Products Corp. biotech campus in Ireland, and a four-year, $230 million subcontract from the U.S. Department of Energy to provide management and installation services at an experimental laser plant in Northern California.

By working on a wide range of projects for clients involved in everything from pharmaceuticals and biotech to paper and petroleum, Jacobs has gone a long way toward insulating itself from down cycles in any one sector. Scharf said chemicals is one of the only areas where Jacobs might have trouble finding work in the near future, and that’s expected to last another year or so.

Prosser said he expects last month’s passage of Proposition 35, which allows Caltrans to outsource some of its engineering work, could bring more business to Jacobs. However, he doesn’t expect the measure to be a significant factor in the company’s future.

“We do have an operation in California that focuses on the infrastructure business,” he said. “It’s just one factor in our overall future and we’ll have to wait and see how quickly that comes about.”

One dip in Jacobs’ stock price came at the start of July, during the firm’s negotiations to buy Boston-based Stone & Webster Inc., another engineering and construction firm. An agreement of sale was canceled in July when another company outbid Jacobs.

Scharf and Fritz von Carp, an analyst with Merrill Lynch Global Securities in New York, agreed that the negotiations for Stone & Webster, which reorganized under Chapter 11 bankruptcy, temporarily had a negative impact on Jacobs’ stock.

“Some of our competitors (other stock analysts) thought Stone & Webster was a poorly run business,” von Carp said. “Some shareholders were concerned.”

Prosser said that Jacobs is projecting a 15 percent income growth rate for fiscal 2001, driven both by acquisitions and internal expansion. He declined to discuss details or any new markets that Jacobs might be exploring.

Scharf said one possible problem he sees on Jacobs’ horizon is a likely shortage of architects and engineers in the workforce.

“If they can work around that, if they’re not really impacted by a labor problem, overall, the prospects look pretty good,” he said.

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