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Jacobs Engineering Group – Taking a Constructive Long-Term View
Posted by: Dr. Paul Price (IP Logged)
Date: October 14, 2009 02:13PM

JEC:NYSE --- Oct. 14, 2009 - $44.60
52-week range: $26.00 (Nov. 20, 2008) - $54.71 (Jan. 6, 2009)


Jacobs Engineering Group provides engineering, procurement, construction, and maintenance services to a wide range of customers, including oil and gas, chemical, pharmaceutical companies as well as for U.S. federal government agencies. Most work takes place in the USA, U.K. and Ireland.


Jacobs has had an enviable long-term record of increasing sales, earnings and book value. They have done this all with internally generated funds. As of June 30th they held $1.059 billion in cash against less than $48 million in total debt.


Here are their per share (split adjusted) numbers as reported by Value Line:


FY (end Sep.) Sales C/F EPS B/V Avg. P/E
2002 41.59 1.32 0.99 6.30 17.5x
2003 41.33 1.46 1.14 7.54 17.1x
2004 40.51 1.44 1.13 8.86 19.3x
2005 48.47 1.71 1.29 9.81 20.2x
2006 62.90 2.08 1.64 12.03 23.4x
2007 70.49 2.85 2.35 15.34 21.6x
2008 91.70 3.98 3.34 18.30 24.1x




Zacks sees FY 2009 and FY 2010 EPS at $3.26 and $2.98 respectively. That takes into account both the slow economy as well as the less than robust market conditions in the oil and gas industry.


That puts the trailing multiple at about 13.7x and the forward year’s P/E at< 15x. Compare those with the historical P/E valuations in the prior 7 years from the chart above. A return to about 17 times what should be cyclically low FY 2010 earnings would bring these shares back to over $50 again.


Value Line projects EPS of $4.60 over the next 3 - 5 years. Morningstar assigns a current ‘fair value’ of $53 /share. Standard and Poors assigns JEC their highest (5-Star) rating and carries a 12-month price target of $57 /share. Value Line also notes that Jacobs Engineering has 90th percentile rankings in both ‘price growth persistence’ and ‘earnings predictability’ (with 100th being best).


How can you best play a high-quality stock like Jacobs when you feel the year-ahead earnings will be lower? Consider buying the shares and selling LEAP options for 2012.


Why so long? By then earnings should be picking up with the broader economy. If you leave both the shares and the options alone through their early 2012 expiration (and things go as expected) you will get tax deferment on the gains until you file your tax-year 2012 Schedule D in April 2013.


Jacobs has a fairly high (1.45) Beta making options premiums quite attractive for sellers.

Here’s a play that looks quite good to me right now…


Cash Outlay Cash Inflow
Buy 1000 JEC @$44.60 /share $44,600
Sell 10 Jan. 2012 $50 calls @$10.30 /sh. $10,300
Sell 10 Jan. 2012 $50 puts @$14.30/sh. $14,300
Net Cash Out-of-Pocket $20,000







If Jacobs Engineering rises to at least $50 (+12.1%) by the Jan. 2012 expiration date:

· The $50 calls will be exercised.
· You will sell your shares for $50,000.
· The $50 puts will expire worthless.
· You will have no further option obligations.
· You will end up with no shares and $50,000 cash.


That would be a best-case scenario gain of $30,000/$50,000 or 150% profit
on shares that only needed to rise by 12.1% over the 27-month term of this trade.

That’s a very nice annualized return.


What’s the risk?


If JEC fails to rise to $50 by expiration date in Jan. 2012:


· The $50 calls will expire worthless.
· The $50 puts will be exercised.
· You will be forced to buy another 1000 JEC shares.
· You will need to lay out an additional $50,000 in cash.
· You will end up with 2000 shares of JEC.



What’s the break-even point on the whole trade?


On the original 1000 shares it’s their $44.60 /share purchase price
less the $10.30 /share call premium = $34.30 /share.


On the ‘put’ shares it’s the $50 strike price less the $14.30 /share
put premium = $35.70 /share.


You average cost would be $35.00 /share.

JEC could drop by as much as $9.60 /share or (-21.5%) without
causing a loss on this trade. While it’s not impossible that Jacobs could be that low it seems unlikely. The absolute lows in calendar 2006 and 2007 were $33.60 and $38.30 respectively on EPS of $1.64 and $2.35. Book Value has increased about 80% since 2006 and EPS by almost 99%.



Disclosure: Author is long JEC shares and short JEC options.



[www.BeatingBuffett.com]


Stocks Discussed: JEC,
Rate this post:

Rating: 4.5/5 (6 votes)



Re: Jacobs Engineering Group – Taking a Constructive Long-Term View
Posted by: DaveinHackensack (IP Logged)
Date: October 14, 2009 02:31PM

Most work takes place in the USA, U.K. and Ireland.

USA = bad economy.

UK = worse economy

Ireland = awful economy.

Maybe that's all priced into this stock, I have no idea. But Ireland's economy in particular is among the hardest hit of any developed country now.



My signature: I blog at [steamcatapult.com]


Stocks Discussed: JEC,
Rate this post:

Rating: 1.6/5 (5 votes)



Re: Jacobs Engineering Group – Taking a Constructive Long-Term View
Posted by: Dr. Paul Price (IP Logged)
Date: October 14, 2009 02:35PM



Dave,

When things looked good in those geographic areas JEC shares traded at $99.60 and $103.30 peak prices (in 2007- early 2008).

At today's price it look cheap. With the extra cushion from the options it looks even better.


Stocks Discussed: JEC,
Rate this post:

Rating: 2.6/5 (5 votes)



Re: Jacobs Engineering Group – Taking a Constructive Long-Term View
Posted by: DaveinHackensack (IP Logged)
Date: October 14, 2009 02:42PM

Fair enough, Paul. You know more about this company than me. Just pointing out for those who are unaware that those two countries aren't in great shape economically now.

My signature: I blog at [steamcatapult.com]


Stocks Discussed: JEC,
Rate this post:

Rating: 2.5/5 (6 votes)



Re: Jacobs Engineering Group – T...
Posted by: rharmelink (IP Logged)
Date: October 25, 2009 11:35PM

To give the 150% return some context, using a similar position and calculations on SPY:

DescriptionOutflowInflow
Buy 500 SPY @ $108.08 / share$54,040
Sell 5 Dec 2011 $120 call @ $8.50 / share$4,250
Sell 5 Dec 2011 $120 put @ $22.10 / share$11,050
Net Cash Out-of-Pocket$38,740
Cash proceeds from exercised call$61,000
Dividends$2,552
Total Return103.5%


Stocks Discussed: JEC,
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Rating: 3.0/5 (4 votes)



Re: Jacobs Engineering Group – T...
Posted by: Dr. Paul Price (IP Logged)
Date: October 26, 2009 12:00AM



rharmelink,

Your math is wrong. If your prices are correct...

Net Outlay $38,740 less $2,552 in dividends = $36,188.

$61,000 - $36,188 = $24,812 profit

$24,812 / $36,188 = 68.56% NOT 103.5%


Stocks Discussed: JEC,
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Rating: 3.0/5 (3 votes)



Re: Jacobs Engineering Group – T...
Posted by: rharmelink (IP Logged)
Date: October 26, 2009 12:40AM

The dividends can't be subtracted from the initial outlay -- they will be paid over the 26 months between now and the end of 2011. But you're right -- I did double-book the options, as I thought you were doing, but it appears you're not. My apologies. How about:

DescriptionOutflowInflow
Buy 500 SPY @ $108.08 / share$54,040
Sell 5 Dec 2011 $120 call @ $8.50 / share$4,250
Sell 5 Dec 2011 $120 put @ $22.10 / share$11,050
Net Cash Out-of-Pocket$38,740
Cash proceeds from exercised call$61,000
Dividends$2,552
Total Return64.0%




Stocks Discussed: JEC,
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Rating: 2.0/5 (2 votes)



Re: Jacobs Engineering Group – T...
Posted by: valueworldguru (IP Logged)
Date: November 17, 2009 10:14PM

JEC took a hit today. Does the above thesis still hold and make it an attractive buying opportunity.


Stocks Discussed: JEC,
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Rating: 2.0/5 (2 votes)



Re: Jacobs Engineering Group – T...
Posted by: Dr. Paul Price (IP Logged)
Date: November 17, 2009 10:34PM



I wrote some Jan. 2012 $50 puts today.


Stocks Discussed: JEC,
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Rating: 2.0/5 (2 votes)



Re: Jacobs Engineering Group – T...
Posted by: Adib Motiwala (IP Logged)
Date: December 31, 2009 02:10PM

I was using the same strategy of buy- write as well as writing Put options, however i was doing it for 1 month expiration. The 2nd month i got hit when JEC took a hit. I now own shares at $45 minus the option premiums collected for 2 months.

Should I sell covered call for 2012 now or wait for it to cover to 40's ? I dont want to write PUTS and add to my holding in case JEC is still down.


Stocks Discussed: JEC,
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Rating: 5.0/5 (3 votes)



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