Jacobs Engineering Group, the Pasadena-based engineering and construction giant, saw some heady times in 2007 thanks to the oil boom, and robust commercial and public works markets. But can the good times continue to roll through 2008?

Last year, Jacobs’ stock nearly doubled to $100 per share as project orders poured in across nearly all of its market sectors, but especially from the oil and gas industry. With oil prices soaring to nearly $100 a barrel, energy companies revved up their exploration and refining capacities, giving Jacobs a lot of the engineering and construction work.

As a result, the backlog of work at Jacobs skyrocketed 45 percent to $15 billion for the fiscal year ending Sept. 30, while revenues jumped 14 percent to $8.5 billion. That in turn sent the stock soaring 90 percent during 2007, an unusual run for a company as big as Jacobs. (With a market capitalization of $9.5 billion, Jacobs is the eighth biggest publicly traded company on the LABJ 200 list of local companies.)

But since the new year, it’s been a different story for Jacobs’ stock. Caught in an industry downdraft and a general market selloff, the stock fell 26 percent through Feb. 12 to about $75 a share. Fears that a slowing economy would crimp government and private sector construction spending have driven the entire industry down about 13 percent since Jan. 1. Jacobs’ stock, which was at the high end of analysts’ targets, has been hit harder than most.

“The fundamental outlook for Jacobs is still quite strong; it’s just a very tough market for anyone in engineering and construction right now,” said Steven Fisher, analyst with UBS Investment Research in New York. (UBS receives compensation from Jacobs.) “It doesn’t help that oil prices have fallen off from their record highs.”

Oil and gas boom

Jacobs executives are used to the ups and downs of the engineering and construction business, and are forging ahead despite the swings. “We continue to believe we can grow this business at 15 percent forever more,” President and Chief Executive Craig Martin told analysts last month as the company released its first quarter earnings.

Martin said that the company’s business model of focusing on repeat work for customers instead of rushing into hot sectors is the key to consistent growth. “Generally, our industry is very transactional in its approach to businesses. And so there is a lot of pursuit of lump-sum turnkey work,” he said of Jacobs’ competitors, which include companies like Irving, Texas-based Fluor Corp.; Los Angeles-based Aecom Technology Corp.; and Clinton, N.J.-based Foster Wheeler Ltd.

With roughly 40 percent of its work coming from the oil and gas sector, those relationships with the major oil and refining companies have paid off handsomely in the last few years. For example, Jacobs has been busy expanding refining capacity for client facilities on the Gulf Coast and in Europe, while also helping other clients extract oil from sands in western Canada.

Jacobs also has been growing its work for chemical companies (11 percent of the company’s revenue stream), and hospitals and other health care facilities. But this has been offset by somewhat slower growth rates for pharmaceutical clients, and customers in the consumer products and pulp/paper industries.

In addition, Martin voiced his concern about prospects in public infrastructure spending, which until now has been fairly robust. “Obviously, there are some issues out there with the tax situation and deficits in some of the states,” he told analysts.

In states like California, though, where much of the infrastructure work is funded through bond offerings, the impact of these deficits should be limited, according to John Prosser, executive vice president and treasurer for Jacobs.

Also, on the public works side, Jacobs should be able to boost market share with its recent acquisition of Fort Worth, Texas-based Carter & Burgess Inc., an infrastructure engineering firm.

Trouble ahead?

Indeed, the expected economic slowdown has taken its toll on the entire engineering and construction industry, despite company reports of robust earnings through fourth quarter 2007.

“The shares of E & C; stocks have come under significant pressure in recent weeks as a result of growing fears of reductions in construction spending levels,” said John Rogers, analyst with Lake Oswego, Ore.-based D.A. Davidson & Co. in an industry update issued earlier this month. “These fears have more than offset continuing positive comments and reports on fourth quarter 2007 financial performances and expectations for further revenue and earnings growth in 2008.”

That’s been compounded by fears of what a global economic slowdown might do to the price of oil, especially if demand in Asia were to slacken.

With its record $15 billion backlog, Jacobs might seem to be immune from such concerns. But if the economy were to lurch into recession or oil prices were to tumble, there’s some investor concern that projects on the books but not yet started might be put on hold, which in turn would hit Jacobs’ revenue stream.

“History shows that we’ve had very few cancellations from our backlog, though we sometimes get delays,” Prosser said. He added that the oil-related projects would still be viable even if oil prices fell by as much as 50 percent from current levels.

And there’s yet another factor: soaring materials costs. With the cost of steel and other construction materials constantly going up, major projects have become much more expensive. In some cases in the public sector, agencies have either had to drop some projects from their roster or seek additional funds: One recent example was with the $2.2 billion program to modernize the L.A. Community College District, which exhausted its money before all the projects were finished. Such decisions might become even more commonplace in an environment of slower economic growth.

With all this uncertainty, analysts’ price targets for Jacobs vary widely. Friedman Billings Ramsey and Bear Stearns have raised their end-of-year 2008 price targets to $90 per share and $98 per share, respectively, while UBS is lowering its price target to $96 per share from $105.

Whatever the target, UBS’ Fisher said there’s still one thing to keep in mind: Valuations for Jacobs are markedly higher than a year or two ago. “This is a well-run company with a very solid business model that has a huge backlog of work.”