Strength in capital spending gives boost to Jacobs shares.

JACOBS Engineering Group, the Pasadena-based engineering and construction giant, has been riding a wave of corporate capital spending that has helped propel its stock up 40 percent in the last three months to record highs.

As Fortune 500 companies that make up Jacobs' client base have found themselves flush with cash during the economic expansion, they have been pouring money into upgrading their facilities. Among the biggest spenders have been oil companies that have seen a year of record profits themselves.

"What drives the health of Jacobs is the health of its clients, and right now, their clients are seeing improved cash flows and are reinvesting money into their businesses," said Michael Dudas, managing director of equity analysis for Bear Stearns & Co. Inc.

Indeed, Jacobs president Craig Martin told investment analysts at a Lehman Brothers conference last week that six of the eight markets in which Jacobs has a significant presence are performing very well.

As a result, contracts have been pouring in for Jacobs. The company's backlog--a traditional performance yardstick for the engineering/construction industry--rose 20 percent to a record $9 billion at the end of 2005, 50 percent more than its $5.6 billion in annual revenues.

"We often say that if we can get five of our eight markets working well, we can maintain growth. Now we have six markets working well, so we're pretty pleased with where the marketplace is," Martin said.

The company's positive long-term outlook received a boost last month when Jacobs reported earnings for its first quarter ended Dec. 31 that surpassed analysts' estimates. Net income rose to $43 million, 49 percent greater than the same period a year earlier as Jacobs was able to convert more of its backlog into actual work earlier than expected.

That pushed Jacobs' stock price past $80 per share. The stock hit a 52-week high of $84.37 on Feb. 1. Analysts remain bullish on the company, rating it "outperform" in recent reports. They say that the U.S. and global economies have entered a period of increased capital spending, and Jacobs is not alone in reaping the benefits. Competitors such as Aliso Viejo-based Fluor Corp. and Clinton, N.J-based Foster-Wheeler Ltd. have seen similar run-ups in their stock prices.

"Almost all of the company's targeted end-markets are in an upswing, with particular strength in oil/gas, infrastructure and federal markets and a gradually improving outlook for both chemicals and pharmaceutical/biotech markets," said Sanjay Shreshta, managing director with First Albany Capital.

Oil windfall 

By far the biggest market for Jacobs is petroleum: 36 percent of the company's $5.6 billion in revenues in 2005 came from that sector. As prices have risen, oil companies have been raking in record profits. Many of those dollars are being pumped back into oil exploration and drilling, in places such as the North Sea, the U.S. Gulf Coast and Canadian oil sands.

Jacobs builds, operates and maintains drilling and other extraction facilities for major oil companies such as Exxon-Mobil Corp.

Martin said there's also been an upswing in refinery construction, both to expand capacity and to meet environmental requirements. The company has decided not to enter the Iraq market, where billions are being spent to upgrade the country's oil industry but security is a problem.

Domestically, one of the hottest market segments is infrastructure. Public agencies across the country are pouring billions of dollars into projects to repair and expand highways and bridges, improve water quality and upgrade other infrastructure. This trend is epitomized in California, where Gov. Arnold Schwarzenegger has proposed $68 billion in bonds and $222 billion in total spending on infrastructure projects over the next decade.

"There's a tremendous amount of pent-up demand here, so much so that people in counties all across the country are rushing to pass their own sales taxes for transportation rather than wait for the federal government," Martin said.

Jacobs, which entered the public infrastructure market in a big way with a 1999 acquisition, is positioned to benefit from infrastructure spending. However, there is some risk. Materials costs have been rising rapidly, forcing some public agencies to rethink planned projects.

But Bear Steams' Dudas said this will likely have minimal impact on Jacobs, which still gets most of its work from the private sector. Dudas said the bigger risk to Jacobs is an overall decline in economic activity or reduction in capital spending at corporations.

Jacobs Engineering Group (JEC)

Stock Prices

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Quarterly Net Income (millions)

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YEAR (Sept. 30)                 2005     2004

Revenue (billions)             $5.64    $4.59
Total Expenses (billions)       5.39      4.4
Operating Income (millions)      241      198
Net Income (millions)            151      129
Earnings Per Share             $2.57    $2.25

SUMMARY

Business: Engineering and construction
Headquarters: Pasadena
CEO: Noel Watson
Market Cap: $4.77 billion    Dividend Yield: N/A
Total Liabilities: $1.3 billion    P/E Ratio: 29.2
Long-Term Debt: $93.1 million