Cleanup Contract May Benefit Jacobs the Most
When the mammoth Fernald, Ohio, nuclear-waste site cleanup contract was awarded last week, Irvine-based Fluor Corp. got most of the publicity as the leader of the winning team.
Yet Wall Street expects the bigger beneficiary of the $2.2-billion, five-year contract to be Pasadena-based Jacobs Engineering, Fluor’s partner in the deal.
Both Fluor and Jacobs are well-known engineering and construction firms, but Fluor is much larger: Its revenue this year should reach $7.3 billion, versus $1.1 billion for Jacobs.
The disadvantage of Fluor’s size, however, is that the addition of new contracts doesn’t mean as much to the bottom line. For Jacobs, a mega-contract has far greater impact.
That’s even more evident in the case of Fernald, some analysts argue, because Jacobs will be a more important part of the cleanup than its “junior” partner status implies.
The contract, awarded by the U.S. Department of Energy, doesn’t specify how revenue and fees will be split among Fluor, Jacobs and two smaller partners. “We’ve decided that among ourselves,” says Robert Clement, Jacobs’ vice president of marketing. But the companies aren’t giving Wall Street the details.
Nonetheless, analysts believe that Jacobs has snared a significant portion of the contract. Thomas Lloyd-Butler of Montgomery Securities in San Francisco believes that Jacobs will perform much of the “pure” upfront engineering work on the site, at 15% to 18% gross profit margins. That compares to Jacobs’ average corporate-wide gross margin of 11%.
Jacobs “is in the driver’s seat on this contract,” Lloyd-Butler contends. In fact, Wall Street generally believes that federal regulators’ high regard for Jacobs’ work in previous DOE and Defense Department site cleanups was a key to the awarding of the Fernald contract.
“That reputation helped,” agrees John Simon, analyst at Seidler Amdec Securities in Los Angeles. Jacobs needed Fluor, he says, because “Jacobs wasn’t big enough to do this one on its own.”
Lloyd-Butler sees Fernald adding 5 cents a year in earnings per share to Jacobs’ bottom line over the next few years. That will mean 1993 results of $1.25 a share, up 23% from an estimated $1.02 this year (excluding one-time gains), he says.
What about Fluor? Fernald might be worth a few extra pennies a share each year to Fluor, but its earnings base is already much larger than Jacobs’, analysts note. For example, Simon believes that Fluor will earn $1.70 a share this year and $2.05 a share next year. So the impact of Fernald on Fluor is minuscule, in Wall Street’s view.
Fluor officials may not agree with that assessment. While the company says it never discusses earnings expectations, Nick Kaufman, the executive in charge of Fluor’s Environmental Restoration division, says he is “a little surprised” at analysts’ pooh-poohing of Fernald’s potential financial benefit to Fluor.
While analysts focus on profit margins, Kaufman says, it makes more sense to look at how cleanup contracts affect a contractor’s return on investment--a return that is “just incredible,” he says, because the job doesn’t require Fluor to make a heavy commitment of fixed capital. Unlike the case of a new-plant construction contract, the Fernald site is already there and waiting.
Perhaps most important for both Fluor and Jacobs is that Fernald is just the first of 16 such nuclear-cleanup contracts to be awarded by the Department of Energy. Next up: a Hanford, Wash., site expected to be awarded later this year, and a Rocky Flats, Colo., site to be awarded early in 1993.
Fluor and Jacobs are teamed on a Hanford bid, but the Rocky Flats teams still aren’t set. Competing with Fluor and Jacobs for all of these sites are a handful of other engineering firms, including Bechtel, Parsons Corp. and Lockheed.
Analysts believe that the choice of Fluor/Jacobs for the first contract can’t help but give the team an edge on future contracts. In total, the DOE sites could be worth as much as $100 billion in work to engineering companies over the next decade or longer.
On their own, those contracts can’t keep the industry alive. But there’s plenty of other private-sector work out there that has merely been delayed by the weak economy: Clean Air Act-related upgrades at manufacturing plants, oil refinery overhauls and countless potential foreign projects that will need American engineering expertise--much of it developed here in Southern California.
If just some of the recession-delayed projects start to materialize later this year and in 1993, investor interest in the stocks of engineering firms could skyrocket.
For now, most engineering stocks are languishing near their lows of the past year. Last Wednesday, a day after the Fernald announcement, Jacobs’ stock jumped $2.75 to $25.50 on the New York Stock Exchange. It ended the week at $25.625, up from a 52-week low of $21.625 but well below the yearly high of $36.50.
Fluor’s stock rose $1.50 to $39.50 on the NYSE last Wednesday and ended the week at the same price. Over the past year, Fluor has traded as high as $48.125 and as low as $35.25.
On a price-to-earnings basis, these stocks aren’t cheap even at their depressed prices. Yet the Fernald reaction suggests that Wall Street could get much more excited about this industry with a few more bolts of good news.
Portfolio Notes: Stanley Gold, who’s attempting to rescue athletic-shoe firm L. A. Gear, spent a little over $1 million of his own cash to buy 100,000 shares of the company’s stock between July 15 and July 27. He bought at prices ranging from $10.125 to $10.75. The stock closed Friday at $11.875.
Gold’s company, Trefoil Capital, already owns 34% of L. A. Gear as part of a bailout structured last year. The share purchase in July was his first with personal funds. “What can I say--I think it’s a good buy,” he said Friday. . . .
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