Jacobs Earnings: Portfolio Transformation Continues With Planned Critical Mission Solutions Spinoff

We’ve raised our fair value estimate for Jacobs J to $155 from $152 after the company reported solid fiscal second-quarter results, featuring a 5% year-over-year increase in adjusted EPS, and announced plans to spin off the critical missions solutions business in the second half of fiscal 2024. The fair value adjustment reflects our slightly more optimistic near-term operating margin projections and time value of money.

Jacobs’ fiscal second-quarter net revenue increased by roughly 5% from the same period last year, including 7% growth in people and places solutions and 5% growth in critical mission solutions. PA Consulting revenue increased by approximately 1% in U.S. dollars but over 11% in local currency.

Management narrowed its outlook for full-year fiscal 2023 and now anticipates adjusted EPS of $7.25 to $7.45 ($7.20 to $7.50 previously) and adjusted EBITDA of $1.420 billion to $1.470 billion ($1.400 billion to $1.480 billion previously). The company grew its backlog to $29 billion, a 4% increase from the prior-year period, and the gross margin in the backlog is up 50 basis points year over year, which we believe positions Jacobs well for continued revenue growth and margin expansion.

The market reacted favorably to Jacobs’ announcement, as the share price rose by over 3%, though we continue to see the name as modestly undervalued. In fiscal 2022, critical mission solutions generated roughly $4.4 billion in revenue and an 8% operating margin. We believe that critical mission solutions has the potential to build an economic moat based on switching costs and intangible assets. Around 85% of the segment’s portfolio comprises contracts with durations of over four years, giving it significant revenue visibility. We also believe that critical mission solutions is well positioned to capitalize on opportunities in space exploration, robotics, and the 5G buildout.