Infrastructure boost not enough for Jacobs, Goldman says

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In a better economy, President Obama‘s plans to ramp up infrastructure spending might have been icing on the cake for Pasadena-based Jacobs Engineering, which has the know-how to build highways, bridges, tunnels and other public works.

But Goldman Sachs & Co. has been aggressively waving clients away from the stock. The brokerage warns that any lift from infrastructure awards will be more than offset by delays and cancellations of energy and chemical industry projects that are Jacobs’ bread and butter.

On Thursday, Goldman analyst Chris Hussey triggered another sharp sell-off in Jacobs’ stock after reiterating that any benefit the engineering and construction firm derives from higher infrastructure spending is likely to be modest.

The shares tumbled $5.37, or 12%, to $38.90 after Goldman added the stock to its ‘conviction sell’ list. Hussey already had downgraded Jacobs to ‘sell’ from ‘neutral’ on Dec. 12.

Jacobs, which earned $421 million on sales of $11.2 billion in its fiscal year ended last September, had been one of this decade’s hottest growth stocks as management built a thriving business designing and constructing big-ticket projects worldwide.

The shares soared from $8.13 at the end of 1999 to a record $101.58 early in 2008, a gain of more than 1,100%. Few stocks were in Jacobs’ league.

But as recession fears surged in the fall, Jacobs crashed with the rest of Wall Street, plummeting to $26.27 by Nov. 20.

When the market began to turn in late November, however, Jacobs and other engineering issues helped lead the way, thanks to Obama’s pledge to spend billions of dollars on public-works projects.

Jacobs’ shares more than doubled by Jan. 6, to $54, from their Nov. 20 low.

Goldman’s Hussey, in Thursday’s report, asserted the stock wasn’t worth more than $31 for now, down from the $40 price target he gave it in mid-December.

His reasoning:

-- Jacobs, which derives 57% of its revenue from the oil, gas and chemical industries, is likely to see contracts drop off as many companies in those sectors slash capital spending plans because of the plunge in energy prices. Hussey expects Jacobs’ net contract awards in the oil, gas and chemical industries to slump nearly 41% this year, led by declining spending in Canada’s oil sands (the source of 14% of Jacobs’ revenue in 2008).

-- Infrastructure projects accounted for just 13% of the company’s revenue last year. The stock’s bounce last month based on additional contract awards Jacobs might get from the public-works sector was ‘unwarranted,’ Hussey said.

-- All in all, the analyst expects Jacobs’ earnings to ease to $3.30 a share this year from $3.34 in 2008, then slide to $3.05 in 2010.

At $38.90 a share on Thursday, the stock was priced at about 12 times estimated 2009 earnings. That’s a huge drop from Jacobs’ price-to-earnings ratio of about 30 a year ago, but Hussey expects that investors will want to pay even less for the shares, relative to earnings, as business declines.

Jacobs didn’t return a call for comment on Hussey’s report. But investors will hear directly from the company on Tuesday, when management reports quarterly earnings and discusses the 2009 outlook.

-- Tom Petruno