Jacobs Solutions Inc.

Moat: 3/5

Understandability: 4/5

Balance Sheet Health: 4/5

A leading global professional services company that designs, develops, and integrates solutions to address the world’s most complex challenges.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Jacobs Solutions Inc. (J) is a multinational professional services company that offers a broad range of services including engineering, design, and architecture, as well as operations and maintenance. Its clients primarily come from governmental entities, both domestically and internationally and large private sector industries. Jacobs operates in two segments: 1. Critical Mission Solutions (CMS), which focuses on providing engineering, design, and other infrastructure services to government and other public sector clients in areas such as aerospace, cybersecurity, defense, intelligence, energy, and environmental. 2. People & Places Solutions (P&PS), provides design, engineering, architectural, and maintenance services to a variety of clients, especially in buildings, infrastructure, transportation, and water.

Revenue Distribution:

The company’s revenue is broken down primarily into two main categories:

  • Infrastructure & Advanced Facilities (I&AF) comprised of ~43% of the company’s FY24 revenue
  • People & Places Solutions (P&PS), which makes up the remaining 57% of revenue.

In the most recent fiscal year ended in September 2023, 31% of the revenue was derived directly from the US Federal government and agencies.

  • Infrastructure Spending: The global need for infrastructure development and modernization, is a significant tailwind for Jacobs in their CMS segment, especially as it pertains to public sector clients and large infrastructure projects. There also exists a large number of projects funded by the US government by the Infrastructure and Jobs Act, which is a massive multi-year spending program, with the recent CHIPS Act also providing opportunities to Jacobs.
  • Demand for Solutions: Increased demand for technological and scientific expertise is coming from government, energy, and industrial companies. The global transition to clean energy provides significant tailwinds to the P&PS segment, as it caters to companies involved in the energy transition.
  • Focus on Sustainable Solutions: There is growing emphasis from governments and other institutions for solutions to reduce greenhouse gas emissions and better infrastructure to reduce costs while improving efficiency.
  • Labor Shortages: There has been labor shortages in engineering and other expertise fields, meaning more and more companies are relying on consulting companies to fill the skills gap.
  • Geopolitical factors: The war in Ukraine, and growing trade tensions between US and China have created demand in defense industry and cybersecurity, all areas where Jacob excels.

Competitive Landscape:

Jacobs competes in a broad and fragmented professional services market, characterized by a large number of companies with different capabilities.

Some of the key competitors are:

  • Large engineering and construction firms: such as AECOM, Fluor, and Bechtel. These companies also provide similar services and are a source of competition.
  • Other professional services companies: such as Accenture and Booz Allen Hamilton, provide similar services in consulting, cybersecurity and technology.
  • Specialized consulting companies: as well as companies such as Leidos and General Dynamics that focus more on specific industries.
  • In-house departments: Some companies can do engineering or other functions themselves rather than using third-party professionals.
  • Regional and local players: Various small consulting, engineering or architectural firms that operate in particular regions.
  • The nature of the business, in that there are few barriers to entry, means there can be new competitors entering the market all the time.

What Makes the Company Different:

  • Strong relationships with the government: Jacobs has a long history of working with the U.S. federal government and its agencies, as well as governments of other countries. This provides recurring revenue streams, which are more resilient to economic downtrends.
  • Diversified Portfolio: With presence in multiple industries such as infrastructure, aerospace, cybersecurity, technology, healthcare, and transportation, Jacobs is positioned as a provider of expertise to all those industries. Diversification offers a better cushion in case one industry lags in its performance.
  • Global Reach: Jacobs is a global leader, with operations all over the world. This enables a larger scope of revenue generating opportunities.
  • Strong focus on innovation: the company works to provide innovative solutions to clients and also to modernize its existing infrastructure and processes to provide better service to its clients.
  • High Value Offering Many of Jacob’s clients have complex projects and are looking to reduce costs, improve efficiencies, and manage risk. Jacobs brings specialized expertise that they otherwise wouldn’t have and are not easy to replicate.
  • Focus on high-end solutions: Most of Jacob’s work requires talented engineers, scientists, and other professionals. Their clients are not looking for the lowest cost, and are often looking for the best, or a higher grade of service that Jacob is well-positioned to provide.
  • Strong Sustainability Goals: Jacobs has pledged to achieve net zero in its own operations, and continues to see demand for sustainability related infrastructure and programs. They have an expertise in carbon reduction, infrastructure management, and other sustainable programs.

Recent Concerns / Controversies

Jacob’s restructuring program, which was completed in 2022, resulted in restructuring costs and other charges. While management expects long-term profitability from these changes, they could have an impact on short term earnings and cash flows.

The most recent earnings call on August 2nd also showed that while revenues rose, they were still slightly lower than expected. While they expect the rest of the year to improve, this caused the stock price to dip more than 8% on the day. While management noted that their cashflows remain strong, there are potential downside risks to the stock in the short term.

Financials

Jacobs reports revenue as “backlog.” What is important for revenue visibility is the funded backlog. Jacobs had 1.18 billion in revenue during 2023 and over $28 billion in revenue left in backlog. This means Jacob already has work secured for multiple years to come.

  • Revenue: Jacobs experienced year over year revenue growth in 2023. The revenue increased from $14.31 Billion in 2022 to $15.62 Billion. But despite revenue growth, the company’s gross margins were impacted negatively by the global economy, particularly impacting contracts outside the United States.
  • Profitability: A common indicator of operating income is profitability. In 2023, Jacobs operating profit was $676 million which was substantially better than $489 million in the previous year. Operating margins also improved from 3.4% in 2022 to 4.3% in 2023. The company has been focused on reducing costs through restructuring programs, and focusing on high value, profitable programs.
  • Cash Flow: A key aspect that Jacobs has focused on for the last couple of years has been to improve their cash flows, which has proven successful. They had a positive cash flow from operations in 2023.
  • Debt and Leverage: The debt-to-equity ratio is an important measure of financial risk. Jacobs has traditionally held a relatively small amount of debt. For fiscal year 2023, their D/E was 0.7, compared to an average of 1.0 for their peer group. Although they did have 2.6 billion in debt for fiscal year 2023, they have managed to refinance their debt and extend its maturity.

Moat

Jacobs can claim a narrow, but solid moat based on a combination of factors, including its customer relationships and its specialized expertise. It also faces strong barriers to entry by other companies.

  • Customer Relationships: As a company that works primarily in consulting and other services in various industries, the ability to get and retain contracts is important to a company’s success. Jacobs is the leading provider of engineering, design and other services to the US Government. The long and successful history has helped them build close working relationships, giving an advantage over new entrants.
  • Scale and Unique Assets: The ability to handle large infrastructure projects for governments is something that not all companies can achieve, and so gives the company a good edge over its competitors. With large-scale projects, they create unique proprietary skills and processes.
  • Specialized Knowledge and Skills: Companies like Jacobs that provide specialized expertise in technological and scientific areas are needed to fill a skills gap, and as technology advances and becomes more complex, their services become more important over time. They have some expertise that is difficult for other companies to replicate.

Given these factors, Jacobs may not have the strongest moat out there, as many of its competitive advantages are not necessarily unique to the company, and can be seen in some of the large competitors.

Moat Rating: 3 / 5

Risks to the Moat and Business Resilience

  • Competition: As the market is not concentrated, there will always be threats from new entrants and established players that can challenge the company’s competitive advantages. As Jacobs becomes more successful, it will face more competitive pressures, which may force them to take on contracts that may not be as profitable.
  • Technological Obsolescence: As a technological and scientific consulting provider, they must keep pace with new emerging technologies, and must constantly be innovating. New technology or processes can make Jacob’s existing offerings outdated, which can diminish their profitability.
  • Reliance on Government Funding: Since most of Jacob’s revenue comes from the U.S. government, any change in public spending can have a drastic effect on the company’s ability to book and win new contracts.
  • Geopolitical Risks: The company relies on a stable global economy, and international operations are subject to geopolitical uncertainty and disruptions. Any downturn in a particular region may cause lower revenue and hurt future prospects.
  • Contractual Risks: Jacobs relies heavily on fixed priced contracts, which can lead to losses if they mismanage costs or have poor forecasting ability.
  • Pricing Pressure: In some market segments, they are under pressure to provide low prices and be as cost-competitive as possible, which reduces margins.
  • Poor Integration and Execution of Acquisitions: Jacobs has recently acquired several companies and a failure to integrate them well could hurt future revenue generation. Further, integration and restructuring costs may also negatively impact short term earnings.
  • Economic Sensitivity: As a professional services firm that works with different industries, it is more sensitive to macro economic downturns and business slowdowns than say a typical consumer company. A decrease in demand for its services, either by industries or governments, may impact revenue and profits.
  • Dependence on Talent: A significant part of Jacob’s business depends on key employees to lead projects and to drive business. Any employee shortages, especially in specialized or senior employees, may impact business continuity.

While Jacob has proven to be extremely resilient, these are some factors that should be accounted for when thinking about the company and its future.

Understandability

Jacobs operates a professional service business, and for those familiar with the industry, its operations are reasonably easy to understand. They provide consulting services across many different verticals, and its financial results are easy to access and interpret. However, the nature of its government business means understanding specific details of revenue, contracts, and funding can become complex.

Understandability Rating: 4 / 5

Balance Sheet Health

Jacob’s balance sheet remains quite strong, with manageable amounts of debt and a low debt-to-equity ratio. Cash flows have been improving, making them better positioned for the future.

Some key indicators are:

  • Current Assets: $10.37 Billion (mostly in cash, receivables, and contract assets)
  • Current Liabilities: $7.0 Billion (mostly contract liabilities and trade payables)
  • Cash: $1.25 Billion
  • Total Assets: $20.9 Billion
  • Total Liabilities: $12.6 Billion
  • Long-term Debt: $2.6 Billion
  • Stockholders’ Equity: $8.26 Billion

Based on these metrics, Jacob seems to have a very healthy balance sheet, with enough current assets to cover current liabilities. The cash they hold is a decent buffer, and the long-term debt, though significant, is within their manageable bounds, particularly with the refinancing.

Balance Sheet Health: 4 / 5