Chapter one of A Fistful Of Valuations In The Style Of Warren Buffett & Charlie Munger by Bud Labitan
A Fistful Of Valuations - Chapter 1
An estimated valuation of Jacobs Engineering Group Inc. (JEC) was first performed on 5/6/2010.
Jacobs Engineering Group Inc. is a technical professional services firm in the United States. It provides a range of technical, professional, and construction services to industrial, commercial, and governmental clients globally. It provides four categories of services, including project services, which include engineering, design, architectural, and similar services; process, scientific and systems consulting services, which includes services performed in connection with a range of scientific testing, analysis, and consulting activities; construction services, which encompasses construction services, as well as modular construction activities, and includes direct-hire construction and construction management services, and operations and maintenance services, which includes services performed in connection with operating facilities on behalf of clients, as well as services involving process plant maintenance. In February 2010, the Company acquired Jordan, Jones and Goulding, Inc.
Does JEC make for an intelligent investment or intelligent speculation in 2010? The 2015 discussion starts at the end of this chapter.
Let’s do a rough estimation of intrinsic value per share for 2010. Starting with a base estimate of annual Free Cash Flow at a value of approximately $400,000,000 and the number of shares outstanding at 125,000,000 shares (In 2015, the current number of shares outstanding is 123,800,000 .); I used an assumed FCF annual growth of 11 percent for the first 10 years and assume zero growth from years 11 to 15. I now realize that I was too optimistic in my growth assumptions. At the time, I thought that global economic growth for JEC’s services would bounce back from the great recession. With that being said, let’s look at what I wrote in 2010.
Review the Free Cash Flow record here, and think about its sustainability:
The resulting estimated intrinsic value per share (discounted back to the present) is approximately $61.76. Market Price = $44.27 Intrinsic Value = $61.76 (estimated) Debt/Equity ratio = .03 Price To Value (P/V) ratio = .72 and the estimated bargain = 28. percent.
At that time, I was quite impressed by its low debt level.
Before we make a purchase decision, we must decide ( filter #1 ) if JEC is a high quality business with good economics. Does JEC have ( filter #2 ) enduring competitive advantages, and does JEC have ( filter #3 ) honest and able management. The current price/earnings ratio = 17.6 Its current return on capital = 10.68 Using a debt to equity ratio of .03, JEC shows a 5-year average return on equity = 16.9
The biggest threat to profitability is: Competition and Economic Downturns. The main competitors are: Bechtel Group, Inc. (privately held), FLR = Fluor Corporation, FWLT = Foster Wheeler AG, Technical Services Industry.
The Main Competitive Advantage currently is: Ability to provide a broad range of technical, professional, and construction services to industrial, commercial, and governmental clients globally.
Further discussions on competitive pressures can be viewed here: http://www.wikinvest.com/stock/JEC
You the reader can insert your notes about management here:
Some industries have higher ROE because they require no assets, such as consulting firms. Other industries require large infrastructure builds before they generate a penny of profit, such as oil refiners. Generally, capital-intensive businesses have higher barriers to entry, which limit competition. But, high-ROE firms with small asset bases have lower barriers to entry. Thus, such firms face more business risk because competitors can replicate their success without having to obtain much outside funding.
In this case of Jacobs engineering, I failed to look at the business economics in terms of its operating margin and net profit margin. Its historical net profit margins have been rather weak. These range from 2.5% to 3.7%
Readers should know that growth benefits investors only when the business in point can invest at incremental returns that are enticing; only when each dollar used to finance the growth creates over a dollar of long-term market value. In the case of a low-return business requiring incremental funds, growth hurts the investor. The wonderful companies sustain a competitive advantage, produce free cash flow, and use debt wisely.
Does JEC make for an intelligent investment or speculation today? Time is said to be the friend of the wonderful company and the enemy of the mediocre one. Before making an investment decision, seek understanding about the company, its products, and its sustainable competitive advantages over competitors. Next, look for able and trustworthy managers who are focused more on value than just growth. Finally ask: Is there a bargain relative to its intrinsic value per share today?
Great investment opportunities come around when excellent companies are surrounded by unusual circumstances that cause the stock to be misappraised. In terms of Opportunity Cost, is JEC the best place to invest our money today? Or, are there better alternatives? How will JEC compete going forward? Technologies change and new technology can emerge. Keep in mind that a financial report like this is a reflection of the past and present. It may be used to project a future, but it may not account for factors yet unseen. Therefore, pay attention to competitive and market factors that may affect changes in profitability.
On May 19, 2010, Zacks Equity Research stated that Jacobs’ track record of contract wins has encouraged analysts to raise their estimates. Further, Jacobs’ high level of liquidity, with a net cash of $743 million, was projected to help sustain JEC during these difficult market conditions.
In summary, using a debt to equity ratio of .03, JEC shows a 5-year average return on equity = 16.9 . Based on a holding and compounding period of 10 years, and a purchase price bargain of 28 percent, and a relative FCF growth of 11 percent, then the estimated effective annual yield on this investment may be greater than 14.3%. Going forward, are there any transformational catalysts or condition indicators imaginable on the horizon? Technologies change and new technologies will appear on the scene. Would brand loyalty keep customers buying here?
SEC Filings online:
Now, let’s discuss Jacobs Engineering Group Inc. (JEC) results over the past five year period. As a business, the Net Profit Margin of Jacobs Engineering was in the range of 2.48% in 2010. In 2015, the Net Profit Margin is 2.94% TTM. This indicates that Jacobs Engineering has low profit margins.
The data presented in the tables comes from the free public version of Morningstar’s website.
The Return On Equity of Jacobs Engineering was in the range of 8.97% in 2010. In 2015, the Return On Equity is 8.11% TTM. This indicates that Jacobs Engineering has a respectable return, considering the global industrial macroeconomic sluggishness of the past five years. However, there may be some positive upturn for 2015 and 2016.
The main competitors of Jacobs Engineering are: FLR = Fluor Corporation and the BECHTEL GROUP, INC. (privately held). Also, thousands of smaller Technical Services firms compete for projects globally.
Headquartered in Pasadena, California, USA, Jacobs Engineering provides services through more than 200 offices located around the globe, primarily in North America, South America, Europe, the Middle East, India, Australia, Africa, and Asia.
Jacobs Engineering is a large company with over 66,300 employees in over 25 countries. Employees frequently move around the system as they grow their careers and serve clients. Its latest annual report of 2014, management claims that JacobsValue+SM ("Value Plus") is an internal tool that they use to document and quantify the actual value or savings provided to their clients and their projects. Some of the benefits achieved through the Value Plus program include lower total installed cost, shorter schedule, and reduced life cycle cost. When the Value Plus cycle is complete, the project team and client identify unique cost and/or schedule reductions for the project.
From this case, I have learned to appreciate that this large engineering business is subject to the ups and downs of global business cycles. It appears to be a well run organization that uses strategic acquisitions to fuel growth and capture new business opportunities.
As of October 20th, 2015, Valuepro.net estimates the intrinsic value per share of JEC at: $72.71 The market price is at: $39.34
Therefore, Jacobs Engineering is still a bargain at this time. So, is Jacobs Engineering a business that I would invest in today? If I knew that the global economic growth cycle would turn upward in the next three to five years, I might.