Jacobs Solutions Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Jacobs Solutions Inc. is a professional services firm offering a range of technical, scientific, and management services to government and private sector clients. It operates primarily in the infrastructure, aerospace, and defense markets.

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.

Jacobs’ business model is built upon providing specialized engineering, construction, and consulting services, often requiring long-term contracts and deep industry expertise. Their goal is to have a diverse revenue base and be agile enough to respond to changing client needs.

Business Overview

Jacobs Solutions Inc. operates through two main segments: Critical Mission Solutions (CMS) and People & Places Solutions (P&PS).

  • Critical Mission Solutions (CMS): This segment serves government clients, primarily in the aerospace and defense sectors. It focuses on technically complex projects, such as engineering design, systems integration, cyber solutions, and intelligence capabilities. This includes government infrastructure.
  • People & Places Solutions (P&PS): This segment caters to both government and private sector clients. It focuses on infrastructure design, construction, and program management, including transportation, water, buildings, and advanced manufacturing sectors. P&PS also includes some industrial projects.

Here is a breakdown of its revenue distribution:

  • Geographically, about two-thirds of revenue comes from the Americas, including the US, while the rest comes from international markets, particularly in Europe, the Middle East, and Australia.
  • By client type, a larger proportion of revenues come from government contracts and contracts with large corporations.

Jacobs has increasingly focused on the technology side of their services, with a larger push in tech and data analytics, as well as in R&D.

The professional services industry is experiencing several important trends:

  • Increased infrastructure spending: Governments are increasingly investing in infrastructure, driven by aging infrastructure and the need for modernization.
  • Digital Transformation: There is a greater need for digital solutions in both public and private sectors, which are driving growth in IT, cybersecurity, and data analytics services.
  • ESG considerations: Environmental, social, and governance (ESG) factors are becoming increasingly important in business strategies and government policies, increasing demand for sustainable solutions and consulting services.
  • Focus on resilience: Events like COVID-19 have caused corporations to consider risk assessment and increase the resilience of their value chain and operations.
  • Technological advancements in all sectors: There is demand for companies that can provide specialized technology solutions.

Competitive Landscape

Jacobs operates in a competitive market, with key competitors including AECOM, Fluor, and other large, global engineering and construction firms. The company is also competing with specialist firms and large technology consultancies for some market segments. The barrier to entry is generally considered to be moderately high with the large projects needing specialized skills, resources and experience to perform.

Moat Analysis: 2 / 5

  • Switching costs: There are moderate switching costs for Jacobs due to long-term contracts and the need for industry-specific expertise. Clients may have invested time and resources in working with Jacobs, making a switch more complex than just going for a lower price.
  • Intangible Assets: Jacobs possesses a solid reputation and brand recognition in the engineering and construction industry. Although not at the level of luxury brands that would create a moat, the company is well-known for its quality in delivery of projects. They have a proprietary database of financial information about past projects.
  • Economies of scale: As a larger organization, Jacobs has certain scale advantages, allowing it to offer its services at a competitive price and potentially benefit from process and location advantages.
  • Network Effects: There is evidence of a network effect, as shown by a greater interest to join their group for companies they acquire, leading to greater cross-selling potential and higher returns in the future.

Justification: Jacobs has a business that is somewhat hard to replicate, but it has low pricing power, and is not at all impervious to external competitors. It therefore lacks a strong and wide moat.

Risks to the Moat

  • Competition: Aggressive competition from competitors can pressure pricing and reduce margins, eroding value creation.

The competition landscape is not always stable, with new entrants and old competitors trying to get their market share. Even if Jacobs has a good strategy, they may underperform their rivals.

  • Project Execution: Problems in executing projects, such as cost overruns or delays, could damage Jacobs’ reputation, and make it harder to find new clients, thereby eroding the moat.
  • Technological obsolescence: Given the focus on technology within the company, there is a danger that old technology is abandoned as new technology is introduced.
  • Economic cycles: The company is sensitive to macroeconomic conditions and government spending patterns, which could cause cyclical revenue flows and reduce returns.
  • Management missteps: An error or bad strategy by the management could hurt the brand, profitability, and reputation of the company, and therefore hurt its ability to grow value.
  • Geopolitical risks Conflicts and geopolitical instability in certain regions may cause major disruptions in the projects they are carrying out, thus hurting profitability and cash flow.

Financials Analysis

Jacobs’ financials show a company with a solid, although not extraordinary, financial structure.

  • Revenue Growth: While Jacobs has seen some increase in revenue, growth is mainly driven by acquisitions rather than organic growth. This indicates a company that has to go out and find new clients, instead of demand coming from their existing businesses.
  • Profit Margins: Gross profit margins are quite healthy, usually hovering around 20%, however, margins can vary as they are impacted by project type, competition, and the region they operate in.
  • Cash Flow: Operating cash flows are generally stable and positive, however, they have been significantly affected by increased R&D and acquisitions. They have a relatively large amount of capital tied up in accounts receivables.
  • Debt Levels: Debt levels are stable and manageable. The company’s debt is mostly due in short term.
  • Return on Invested Capital (ROIC): Jacobs produces an adequate ROIC, hovering in the 10 to 15% range. Note, that ROIC might be inflated by a large portion of goodwill.
  • Acquisitions and Goodwill: A large part of the company’s assets come from acquisitions, which have inflated the size of the company and created a large amount of goodwill in the balance sheets. While these are not necessarily bad, and may lead to value creation, they are worth monitoring.
  • Shareholder Returns: Given the small dividend yield (around 0.6%), and a focus on acquisitions and growth, the company prioritizes growth and expansion of the company rather than returning money to shareholders.

The company has had a focus in R&D and technology development, and has made significant investments there. They have also put aside a large amount of funds for acquisitions in the future, making sure that they are able to generate value in the long term. These factors make short-term financial results less impressive, but increase the probability of long-term growth.

Understandability: 3 / 5

Jacobs’ business is reasonably complex. While the general idea of providing project management and consulting services is easy to understand, the specific nature of the projects—especially those in the aerospace and defense sector—can be quite technical, and hence, difficult to evaluate for non-industry experts. The industry structure and competitive landscape are also subject to different business dynamics, creating uncertainty.

Balance Sheet Health: 4 / 5

Jacobs’s balance sheet is in good health. The company maintains a stable level of debt, good current assets, adequate cash levels, and a fairly low risk profile. There is no evidence of a large amount of unsustainable borrowing or bad assets.

Recent Developments

  • Acquisition of BlackLynx: In 2022, Jacobs completed the acquisition of BlackLynx, a provider of cyber and intelligence solutions, further growing their presence in highly technical markets. They aim to get a share of the increasing government spending on cybersecurity.
  • Focus on growth: The management has noted that they are focused on revenue growth from the company’s core sectors, while focusing on improving operational efficiency and cost control to deliver profitability. The focus has moved from project risk management to growth and diversification.
  • Strong backlog: Jacobs currently has a large backlog of projects, which provides good visibility on future revenue streams, but they need to maintain margins while executing them.
  • Inflation: The company’s exposure to inflation has made it a priority to increase their prices to maintain their profit margins. They have to work with clients to raise prices without putting their contracts at risk.
  • Focus on Digitalization: Jacobs has noted a shift to digitalization for many of their clients and is seeking to make technology and digitization their primary focus.

Overall Summary

Jacobs Solutions Inc. has been operating as a professional services company in the engineering and construction business for many years, and has adapted its portfolio towards growing sectors such as IT, data analytics and sustainable operations. While the company has seen reasonable profits and has a reasonably solid financial footing, they have failed to show clear signs of a moat, nor very strong organic growth. The company might be a decent investment if the share price is low enough, but I would prefer companies with more resilient business models.