Jacobs Earnings: We Expect Strong Backlog To Drive Revenue Growth and Margin Expansion

While nothing in Jacobs’ J fiscal third-quarter earnings release materially alters our long-term outlook for the firm, we’ve slightly increased our fair value estimate to $156 from $155, mostly due to time value of money. The planned separation of the critical missions solutions business remains on pace to be completed in fiscal 2024. We view the name as moderately undervalued, with shares currently trading in 4-star territory.

Jacobs increased its fiscal third-quarter adjusted net revenue by 7.5% year over year, driven by 9% adjusted net revenue growth in people and places solutions and 7% revenue growth in critical mission solutions. Divergent solutions adjusted net revenue was up 3%, but the segment increased its operating profit by 72% year over year, as the business is focusing on higher-margin opportunities. Also, PA Consulting revenue increased by 3% from the prior-year period, thanks to growth in the energy and defense end markets. Jacobs expanded its adjusted operating margin (calculated as a percentage of net revenue) by roughly 30 basis points, from 10.4% to 10.7%.

Management reiterated its full-year fiscal 2023 outlook and continues to expect adjusted EPS of $7.25-$7.45 and adjusted EBITDA of $1,420 million-$1,470 million. Jacobs ended the quarter with a $28.9 billion backlog, up 3% year over year, and management said on the earnings call that the gross margin in the backlog is up by 85 basis points from the prior-year period, which we think positions the firm well to maintain its momentum into fiscal 2024. We believe that Jacobs is poised to capitalize on opportunities driven by growing investment in infrastructure, including funding from the Infrastructure Investment and Jobs Act in the United States.