JEC’s
principal activities are to provide technical,
professional and construction services. It
provides project services, process, scientific
and systems consulting services, operations
and maintenance services and construction
services to industrial, commercial, and governmental
clients around the world.
Project
services include engineering, design, architectural
and similar services and construction services
include direct-hire construction and construction
management services. It serves oil and gas
exploration, production and refining industry,
pharmaceuticals and biotechnology, chemicals
and polymers, buildings infrastructure, technology
and pulp and paper industries. JEC operates
in the United States, Europe, Canada, Asia
and other countries.
In
2007 JEC acquired Edwards and Kelcey Inc,
John F Brown Company Inc. and W. H. Linder
and Associates Inc.
Estimated
Earnings Per Share
Management
delivered positive initial FY08 guidance of
$2.70-$3.10.
The
strong initial guidance and the phenomenal
backlog of $13.6 billion for fiscal 4Q07,
up 39% year-over-year indicates a strong upside
to JEC. Management comments in a recent market
call centered around downstream refining were
slightly more positive. There is no peak in
this market for JEC in the 2008 time frame.
•
Downstream Momentum Carries Legs Beyond
2008.
We
think management was incrementally positive
around momentum in the downstream industry
continuing beyond 2008 for JEC, driven by
continued regulatory spending such as clean
fuels, non-road diesel, and strong refining
margins.
Regionally,
management expects mid-sized projects to dominate
activity type in the United States and Europe,
and capacity expansions to continue in the
Middle East.
Management
indicated that the migration to mid-sized
projects in the United States
and stabilization in mega-project awards activity
in the Middle East might ultimately create
more difficult comparisons for some of its
peers, but should not effect
JEC's more measured growth approach and primarily
mid-sized project focus.
Management
indicated that oil prices could moderate going
forward. Management
continues to see projects costs topping at
$55/bbl, which sponsors are likely to
deem economical even if oil prices slide somewhat
from current highs.
Upstream
Oil & Gas Growth Robust with Opportunity
for Further Inroads.
Management continues to see a long-term growth
opportunity in upstream with the
help of market share gains.
Management
reiterated that its own sponsors are indicating
a continuation of oil sands activity as planned,
but that said, some of the more marginal producers
could come under pressure. In terms of growth
outside of Canadian oil sands, management
continues to see growth opportunities in upstream
in the Middle East and the Gulf Coast.
Infrastructure
Spending to Remain Strong Over the Long-Term.
Management expects the long-term trends in
infrastructure to be strong and highlighted
its continued expectations of infrastructure
as one of JEC's stronger markets going forward
– that said, management indicated that
the long-term strength might be accompanied
by some near-term choppiness.
While
federal and state funding could taper as tax
revenues are impacted by an economic slowdown
in the United States, management remains confident
that the local bond issuance already announced
and that which is likely, will be sufficient
to support stable trends in the near term.
Outside
the United States, management indicated that
demand remained strong in the United Kingdom,
helped by the build-out related to the Olympics.
National
Government Programs Continue to Deliver Stable
Growth. On the R&D test engineering
and consulting business side, management reiterated
continued momentum with positive activity
in the United States. On the environmental
remediation
front, management indicated strong opportunities
continue to develop in the United Kingdom
related to nuclear decommissioning.
On
the domestic front, management reiterated
that the environmental clean-up market remains
flattish for JEC with some market share gain
opportunities.
Polymers/Chemicals
Market Remains Solid. Management
indicated it expects polymeric chemicals activity
to remain attractive for JEC globally, with
continued small-scale capacity expansions
in North America and Northern Europe, and
larger-scale
investments/capacity expansions in the Middle
East.
Buildings
Market Remains Steady in Healthcare Facilities
and Technically-Intense Structures.
Management indicated that the buildings market
remains favorable for JEC within its niche,
namely, technically intense structures such
as hospitals.
Management
also reiterated that JEC remains a primary
player in the U.S. hospital business, as well
as in the United Kingdom and France.
Pharma/Bio
Market to Remain Steady. JEC continues
to see stable but measured growth in the pharma/bio
market for JEC, with the growth rate somewhat
capped by JEC's already large market share
within the segment. Key drivers remain new
drug
developments and emerging markets in Asia.
Management reiterated a steady flow of projects
in a pipeline from several of its customers
on new drug-related developments, biotechnology
and vaccine business projects.
With
the recent acquisition of Carter & Burgess,
JEC's focus now appears to be more so on upstream
and infrastructure purchases in other geographies,
in particular in the Middle East. Management
also mentioned the possibility of an upstream
acquisition in the Gulf region in the United
States.
Management's
commentary around margins is viewed as conservative.
Management
reiterated expectations of some initial tapering
in operating margins as JEC's transitions
from front-end to field services work, but
for aggregate margins to tick up progressively
after the initial transitional period.
RISKS
Project
Cancellations Could Impact Momentum.
JEC's cost-reimbursable contractual model
buffers the Company against cost over-runs,
but the Company remains susceptible to project
cancellations. In fact, the only time JEC
has materially fallen below its targeted 15%
year-over-year growth performance over the
past decade was in 2004, when select customers
in the pharma/bio space canceled/delayed projects,
and federal programs were slow to roll out
due to heavy allocations for the war in Iraq
and structural changes in the department of
homeland security.
