Engineering company Jacobs Solutions has more than $21 billion of projects in its pipeline -- and a stock that looks too cheap. By Ian Salisbury

Bob Pragada knows he got lucky. The engineering company he runs, Jacobs Solutions, spun off its government business in September, a few months before Elon Musk's Department of Government Efficiency started to ax federal contracting.

"Yeah, I would like to say that was by design," Pragada told analysts in February, acknowledging the good timing of a spinoff that had long been in the works.

Jacobs' lucky break could make the stock a good bet for investors. The company now gets just 9% of revenue from U.S. government services. And Jacobs is involved in 25,000 projects globally with plenty of growth ahead, including water projects, critical infrastructure, and pharmaceutical manufacturing.

The market is missing Jacobs' strengths. Its stock is down 11% this year, worse than the 3.2% average decline for industrial stocks. DOGE is one reason. Another is concern that President Donald Trump's trade war will trigger a recession, causing cuts in capital spending for major projects and hitting Jacobs' backlog. The company says it expects "no material direct impacts" from the tariffs announced so far.

The stock looks too cheap. At around $118, shares go for 18 times estimated 2025 earnings, down from 22 at the start of the year. Profit estimates, meanwhile, have held steady over the past few months; they're expected to rise around 14% this year and 13.6% in 2026, with margins on the upswing.

Jacobs is "going to have top line growth irrespective of the broader economy. That's a pretty unique thing now, given the uncertainty we're seeing," says Bryant VanCronkhite, co-manager of the Allspring Special Mid Cap Value fund.

Founded in 1947, Jacobs was long known for designing pipelines, refineries, and pharmaceutical facilities. About a decade ago, the firm started investing in higher-growth, less-cyclical businesses. In 2017, Jacobs paid nearly $3 billion to acquire CH2M, an engineering and consulting company, pushing Jacobs into the faster-growing water and semiconductor projects. A year later, Jacobs sold its once-core pipeline and refinery unit, for $3.3 billion.

Last year's spinoff of government services, which had brought in more than $4 billion a year in revenue, or 30% of Jacobs' total, completed the new look. Pragada tells Barron's the company is still booking state and local contracts, along with federal contracts for work around military bases, and hasn't seen cancellations. He's also bullish on growth areas such as water, energy, and life sciences, the latter seeing a spending bump from new weight-loss drugs and Alzheimer's treatments.

Today, Jacobs operates in three core segments: water projects; critical infrastructure; and services for life sciences plants, data centers, and other high-tech facilities. The firm also owns a business called PA Consulting, which helps it win bigger slices of projects.

Jacobs says its pipeline of new projects has grown 19% year over year to $21.8 billion, now accounting for about twice its annual revenue. The backlog provides visibility into revenue over the next few years, and analysts track it closely for signs of strength or weakness.

The water business may be the most attractive, with more than $200 billion in global projects available for potential bids over the next five years. Climate change is stressing water utilities as superstorms become more frequent and governments look to fortify systems. Jacobs is the No. 1 engineering design firm to work with water utilities, notes Matt Hayner, co-manager of the Kovitz Core Equity exchange-traded fund, which owns the stock. "These projects are critical," he says.

Last quarter, the water unit's adjusted net revenue grew 11% to $554 million, accounting for about 31% of Jacobs' total (excluding PA Consulting). The company expects the water business to grow 8% to 10% over the next four years, thanks to deals like a recent 10-year contract to operate the wastewater system in Jackson, Miss.

Critical infrastructure, with $879 million in adjusted revenue last quarter, is Jacobs' largest business. The energy side, which won a contract in February from Xcel Energy, looks healthy, with revenue estimated at 11% to 13% growth over the next four years. Transportation and city projects enjoy growth in the mid-single digits.

Jacobs is also getting a lift from smaller but fast-growing areas like life sciences and advanced manufacturing projects -- high-tech facilities to produce pharmaceuticals and data centers for artificial intelligence. Among recent projects: expanding a cell-culture manufacturing plant in North Carolina and designing a 1.2 gigawatt data center campus in Portugal powered by renewable energy.

Granted, projects could be scaled back amid cuts in federal and state spending. About 60% of Jacobs revenue is public sector -- mostly state, local, and overseas governments -- and 40% is private, according to Pragada. "No one is 100% immune from these macrotrends," he says.

Still, Jacobs is trying to fortify itself. Its balance sheet is looking cleaner, following its complex deal to spin off the government business into a company called Amentum. Net debt was down to about $1.2 billion in the company's fiscal first quarter from about $1.7 billion before the deal.

Jacobs also aims to lower costs by performing more of its consulting and engineering work in places like India, where it has 4,000 employees, and Poland, where it has 2,000.

The result should be a more profitable company. Executives aim to increase margins on earnings before interest, taxes, deprecation, and amortization, or Ebitda, to 16% in 2029, from 12.8% at the end of 2024.

Jacobs should also have more free cash flow for dividends and share buybacks. The company spent about $540 million on dividends and buybacks in fiscal 2024, which ended in September.

Its outlook suggests that it could bump that to $800 million this year, including $200 million in buybacks in its first quarter. "We're being even more aggressive in the second quarter," Pragada says. "I can't disclose how much that is, but it's more aggressive."

CFRA analyst Caydee Blankenship sees the stock reaching $155 over the next 12 months, up some 33% from recent levels. That implies a multiple of 22 times earnings, richer than peers Aecom (18 times) and Booz Allen Hamilton Holding (15 times.) But she thinks it's justified based on the company's large backlog and new growth profile. "They've streamlined their business," she says.

Blankenship's $155 target is just above the $150 average from 19 analysts on Wall Street. It's a figure essentially unchanged since November -- another sign that worries about DOGE may be overblown.

Write to Ian Salisbury at ian.salisbury@barrons.com

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April 18, 2025 21:30 ET (01:30 GMT)

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