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Wednesday, May 6, 2009

Jacobs Engineering - charts and fundamentals aligned for more gains?

In looking through the list of Swing Signals we generatedTuesday night, there was one stock that looked especially interesting.

The stock is Jacobs Engineering (JEC). By way of background, the company provides technical, professional, and construction services to industrial, commercial, and governmental customers worldwide.

Looking at the technical setup, it seems to be poised for further gains. Today, as a matter of fact, it gained 2.5%.

Generating a BUY signal on the list of Swing Signals means that JEC bounced off its lower Bollinger Band and that Williams %R is greater than -80. What makes this more interesting than some of the other stocks on the Swing Signals list is that it appears JEC has now retested its 50-day moving average.

After spending April vacillating around the 50-DMA, the stock finally took off from the high $30's into the high $40's. It has now fallen slightly below the 50-DMA and promptly rebounded above it. This implies that the 50-DMA is providing support. A further positive is that the 50-DMA is trending upward in a bullish direction.

All this is visible in the following chart.

In addition to all the technical mumbo-jumbo, there are several fundamental factors that bear discussion.

Earnings up, guidance down --

For the second quarter ended March 31 2009, the company earned $109.3 million, or 88 cents per share, compared with $99.3 million , or 80 cents a share. Revenues rose about 12 percent to $2.98 billion from $2.66 billion. So far so good. What drove the price down to its lower Bollinger Band, however, is that the company cut its 2009 earnings forecast, even as its backlog for orders grew 2.5 percent. Jacobs reduced its earnings estimate to a range of $3.10 to $3.50 a share, from a prior forecast of $3.55 to $3.90 a share.

What could easily be a catalyst to boost the stock price back up to its upper Bollinger Band is that investors may be realizing that there has been an over-reaction. Jacobs Engineering is an excellent play on the resurgence of infrastructure projects. There are several factors here:
  • One is that the U.S. government has targeted infrastructure as part of the stimulus package and projects should begin to ramp up soon. Jacobs is bound to participate in this initiative.
  • Secondly, the stock market is moving lately as if the recession has found a bottom and it's all up from here. If that is true, the global economy should begin to recover and the kinds of technical and infrastructure projects that Jacobs specializes in should begin to swell the company's order pipeline again. Equally important to the stock price, the perception that the economy is recovering, whether it is or not, could be enough to see the price of JEC react sufficiently to provide a swing trading opportunity.
  • A near term catalyst was the announcement yesterday of three contracts: one with the Department of Energy worth $3B over 10 years, another with Suncor that shows there is still life in the energy sector despite oil prices being well off their peak levels and the third with two U.K. government transportation departments to participate in a $24B railroad project.
With a PE of 12 and a PEG of 0.8 the stock cannot be considered especially expensive but it isn't terribly cheap either. The company is also a well known generator of cash with a Levered Free Cash Flow 5-Year CAGR of 34.7%. With recent quarterly revenue growth of 30% and earning growth of 18% while most companies are registering double digit declines, though, shows why the company is considered a top player in its industry.

So with good fundamentals in place, an opportunity to ride a global economic resurgence and an interesting technical chart set-up, Jacobs Engineering is looking like a good trade. If you need more confidence in the stock's potential for gains, wait for it to cross above its 20-day moving average. We're almost there as of the close today.

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