Jacobs Engineering Could Profit From Infrastructure Bank

President Barack Obama has suggested that one way to help create jobs is to start an infrastructure bank -- it would lend money to projects for roads, bridges and other infrastructure. Jacobs Engineering Group (NYSE: JEC), a $4.5 billion market capitalization construction services firm, could be a beneficiary. But should you buy its stock?

The idea of an infrastructure bank could create work at Jacobs and also soak up some of the 1.5 million construction workers currently unemployed. The problem is deficient bridges (25%), leaky pipes (wasting seven billion gallons of clean water daily), and crumbling roads, according to the American Society of Civil Engineers, that cost businesses $2 trillion in 2008 and 2009 through delays, accidents and lost productivity.

The cost to fix these facilities would be $2.2 trillion over five years, according to ASCE, but the infrastructure bank would make loans and guarantees to help defray some of that cost.  And the benefit could be substantial -- for example, economist Mark Zandi estimates that every $1 spent on infrastructure adds $1.59 to GDP.

If Obama can get a bill to create and finance the infrastructure bank through Congress, Jacobs could benefit. Whether that happens or not, here are four reasons to consider investing in its stock:

• Good quarterly earnings. In its third quarter of fiscal 2011, Jacobs' EPS and revenues topped analysts' expectations and it maintained its 2011 guidance and maintained its earnings guidance for the full-year 2011. Jacobs reported EPS of 71 cents -- a penny ahead of estimates while its 9.4% revenue growth to $2.7 billion was about $60 million higher than analysts expected. Unfortunately, Jacobs has only met or exceeded expectations in three of the last five reporting periods -- although it has improved in the most recent quarters.
• Reasonable valuation. Jacobs's price to earnings to growth of 0.88 (where a PEG of 1.0 is considered fairly priced) means it is reasonably valued. It currently has a P/E of 14.3 and is expected to grow 16.2% to $3.01 in its fiscal 2012.
• Rising sales and profits with stronger balance sheet. Jacobs has been growing sales and profits. Its $9.9 billion in revenues have grown at an average rate of 7.8% over the last five years while its net income of $246 million has grown at a 5.7% annual rate over that period -- yielding a slim 2% net profit margin. Its debt has plunged to near zero while its cash has grown solidly -- at a 21.3% annual rate from $434 million to $939 million in those years.
• Out-earning its cost of capital. Jacobs is earning more than its cost of capital – and it’s improving. How so? It produced positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In the first nine months of 2011, Jacobs’s EVA momentum was 1%, based on first nine months' 2010 annualized revenue of $10.1 billion, and EVA that rose from $51 million annualizing the first nine months of 2010 to $134 million annualizing the first nine months of 2011, using a 10% weighted average cost of capital

Jacobs looks like an interesting investment opportunity as is -- if the infrastructure bank becomes reality, its share of the resulting business opportunity would be gravy.