Iraq Isn’t Only Path to Profit for Engineers
Given the hoopla surrounding the contract won by San Francisco-based Bechtel Group for the rebuilding of Iraq, it would be easy to conclude that the best way to make money in the engineering business these days is to follow the bombs.
Yet, in fact, others in the industry are reaping profits by following the boom -- that is, the aging baby boom generation and its increasing need for medical treatment.
“With people getting older and new drugs coming out, pharmaceutical companies have to build a lot of facilities,” explains John Prosser, chief financial officer of Pasadena-based Jacobs Engineering Group, which didn’t even bother bidding for the Iraqi reconstruction work.
Fluor Corp., which lost out to Bechtel on the Iraqi contract, is cashing in on the same demographic phenomenon.
Sure, “we missed the chance to build” in Baghdad, concedes Fluor’s chief executive, Alan Boeckmann. “But we have other customers today -- Eli Lilly, Pfizer, Pharmacia, Bristol- Myers Squibb,” he adds, rattling off a list of drug companies for which Fluor is erecting factories in Europe and the U.S.
By tapping this broad trend -- as well as several others -- Jacobs and Fluor are strong reminders that in spite of the weak global economy, the best-run companies can still find plenty of golden opportunities.
Besides putting up pharmaceutical plants, Aliso Viejo-based Fluor is processing spent nuclear fuel at the federal government facility in Hanford, Wash., constructing missile test compounds in Alaska and even running mess halls and motor pools at U.S. military bases.
That kind of work may not sound as grand or challenging as reassembling the roads, bridges and power plants of a war-torn, oil-rich nation. But, notes Boeckmann, it plays perfectly into increased government spending in certain key categories such as defense and homeland security.
Most important, it is highly profitable. Fluor, with $10 billion in annual revenue, has enjoyed average earnings growth of 25% over the last three years. That contrasts with earnings declines during the same period for the average company in the Standard & Poor’s 500 stock index.
To be sure, Fluor is still hunting for work in the Middle East, where its roots run deep. (Half a century ago, the company grew large by providing engineering services to developers of Saudi Arabia’s oil kingdom.) It already has secured a contract from the Army Corps of Engineers for construction work in the region and is bidding for the job of repairing Iraq’s oil infrastructure.
By contrast, Jacobs is not even angling for contracts in Iraq. The company, which took in $4.5 billion in revenue last year, has concentrated instead on building factories in the U.S. and Europe for electronics makers and, of course, pharmaceutical companies.
What’s more, it has built a $3.4-billion laser-beam center for Lawrence Livermore Laboratory and a similarly advanced project in Britain. Jacobs also has retrofitted oil refineries, nimbly capitalizing on yet another trend. “To satisfy clean-air laws,” says Prosser, “refineries have to get sulfur out of their emissions and their fuel.”
The bottom line: Jacobs’ earnings have grown 45% annually in recent years.
Meanwhile, the company’s move away from the Middle East marks a departure from its past. Founder Joe Jacobs -- who at age 86 still serves as chairman -- is the son of Lebanese immigrants. He took great pride in his company’s building of a potash plant in Jordan in the 1980s.
But Prosser says today is different. “We don’t go seeking work in faraway places among people we don’t know,” he says.
What Prosser means is that restraint is the better part of valor if you haven’t worked in the region recently. Indeed, a mammoth Middle East building job, such as the one Bechtel just won, involves hiring local labor and local suppliers of everything from steel to cement. You have to know who to bring on and how to monitor their work to avoid delays and cost overruns.
At both Fluor and Jacobs, their recent successes have been hard won.
Fluor had long tied its fortunes to oil and gas and minerals. It suffered in the 1980s as commodity prices declined, then lumbered through much of the ‘90s before spinning off its coal operation to shareholders and writing off money-losing activities a few years ago.
Boeckmann, a 29-year company veteran who was named chief executive at the end of 2001, says Fluor is now much less subject to cyclical swings. Oil and gas work has come to account for less than 50% of the firm’s business, he points out.
In the late 1980s, Jacobs Engineering teetered on insolvency after having taken on too many projects at too little profit. Joe Jacobs came out of retirement, appointed today’s CEO, Noel Watson, and together they devised the strategy of serving a select circle of multinational clients that were poised to build and expand mainly in Europe and Asia.
This approach has meant repeat business -- and lots of it. For Merck & Co. alone, Jacobs Engineering last year handled no fewer than 100 projects in Europe, Asia and the U.S.
Merck also happens to be the firm where a young Joe Jacobs, fresh with a doctorate in chemistry from New York Polytechnic Institute, worked in the early 1940s -- a fitting coincidence for a company that is abiding by one of the oldest rules of business: Keep your eyes on the big trends.
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James Flanigan can be reached at jim.flanigan@latimes.com.
