Streamlining Complexities

From building a cutting-edge data center to constructing a waste management system to sending a mission to outer space, companies, and governments increasingly rely on trusted professionals to consult, plan, and manage large projects. These versatile service providers are irreplaceable in our acceleratingly complex world, and the demand for these innovative, comprehensive, and adaptable services continues to grow.

In this edition of the Smart Investor newsletter, we take a closer look at one of the most prominent companies in the professional services industry, providing investors with the necessary information to make informed choices in a constantly changing environment.


Last Week’s Portfolio Movers

❖ Oracle (ORCL): Shares surged on better-than-expected earnings and guidance upgrade thanks to accelerating demand for the company’s Gen2 AI infrastructure. The management said that ORCL has signed several large infrastructure contracts, which drove its total remaining performance obligations (a key indicator of forthcoming revenues) up 29%, reaching a new record high.

❖ Broadcom Inc. (AVGO): The company far outpaced analysts’ fiscal Q1 2024 revenue and earnings estimates and confirmed previously published full-year FY 2024 guidance. The fact that the management remained cautious in its outlook despite blockbuster results disappointed investors, but analysts cheered the company’s sound management and highly successful acquisition of VMware, which is expected to lift AVGO’s annual revenue by 40%. Broadcom is strongly benefitting from surging demand for its networking products in AI data centers, as well as custom AI accelerators. The company’s ongoing focus shift to AI has led several analysts to raise the stock’s price targets.

❖ General Electric (GE): Shares rose after JPMorgan raised its rating to “Buy” and lifted the stock’s price target following the company’s presentation of the impending transformation into a pure-play aviation and defense company GE Aerospace. According to JPM analysts, the new entity will be “the premier large-cap name in Commercial Aerospace” thanks to its strong fundamentals, solid management, and favorable industry position.


Portfolio Earnings and Dividend Calendar

❖ The Q4 2023 earnings season for Smart Investor Portfolio companies has almost ended, but companies whose fiscal year differs from the calendar year continue to report their results. Thus, Ulta Beauty (ULTA) will report its FQ4 2023 on March 14th, and Jabil (JBL) will update on its FQ2 2024 on March 15th.

❖ The ex-dividend date for Textron (TXT) is March 14th, while for Amphenol (APH) and Taiwan Semiconductor (TSM) it is March 18th.



Weekly Portfolio Trades

Today, we are selling onsemi, which suffers from reduced demand from the EV end market. We are replacing it with a global market leader in the professional services sphere, Jacobs Solutions.


New Buy: Jacobs Solutions (J)

Jacobs Solutions Inc. is a leading global professional services company, providing a diverse range of engineering, technical, professional, and construction services, as well as scientific and specialty consulting to industrial, commercial, and governmental clients globally.

The company was founded in 1947, and over the years has grown organically and through acquisitions, evolving from a single engineering consultant to a publicly traded Fortune 500 company. Today, Jacobs commands a market capitalization of $18.5 billion and annual revenues of $16.4 billion. Headquartered in Dallas, Texas, Jacobs has a global workforce of 60,000 employees, working in over 40 countries around the world.


Diversified Leader in Professional Services

Jacobs provides a full spectrum of professional services, including consulting, technical, scientific, and project delivery for the government and private sector. Its consulting services include expert advice on various issues such as technology, security, strategic management, life sciences, advanced manufacturing, and more.

Jacobs is ranked as a #1 data center engineering firm globally (building design & construction), providing integrated planning, architecture, engineering, project and construction management, and commissioning for data center facilities. The company has a vast reach over the electronics industry, as four in five of the world’s computers are built in facilities designed by Jacobs, who set the industry standard for facility modeling, industrial engineering, and cleanroom architecture. Jacobs designs and builds leading-edge manufacturing facilities for life sciences firms. In manufacturing, the company delivers cost-effective projects to consumer goods and products, metals, pulp and paper, and specialty chemical and industrial fermentation firms around the globe.

The company currently operates through four reporting segments: People & Places Solutions (P&PS), which provides critical infrastructure solutions; PA Consulting (PA), in which the company has a majority holding and which provides innovation, transformation, and asset management consulting services; Divergent Solutions (DVS), which offers data and software solutions; and Critical Mission Solutions (CMS), which provides consulting services to governments.

The company derives 49% of its total revenues from its P&PS segment, 35% from its CMS segment, 9% from its PA Consulting business, and 7% from its DVS segment. Jacobs’ revenues are also highly diversified by end-market application, with 32% stemming from its infrastructure consulting and services, 20% from national security contracts, 18% from energy and environmental solutions, and the rest derived from space, health & life sciences, advanced manufacturing, cities & places, and other consulting venues. Geographically, 69% of revenues are from North America, 22% from the U.K. and Europe, and 9% from Asia Pacific and other countries.


Strategic Transformation Enhancing Stakeholder Value

In November 2023, Jacobs management announced that it entered into a definitive agreement to spin off and combine its Critical Mission Solutions and Cyber & Intelligence government services (a part of the DVS segment) businesses with Amentum, a leading global engineering and technology solutions provider. This move is expected to create a new player in the government services sector. The merger intends to establish a global leader in systems integration and technology solutions—trusted by the United States and its allies— to modernize their most complex missions around the world.

The combined company will be publicly traded, with $13 billion in revenue and more than 53,000 employees in 83 countries. The transaction is expected to close in the second half of fiscal year 2024. The new entity will be majority-owned by Jacobs’ shareholders. The tax-efficient transaction is expected to drive significant value for Jacobs’ shareholders, including through an estimated $50-70 million in net cost synergies.

The separation into two entities is a part of Jacobs’ journey towards becoming a more focused and higher-value company. The soon-to-be-separate CMS has grown to be an industry-leading government services provider with significant scale, differentiated services, and deep client relationships. As an independent company, CMS will be better able to focus on its distinct strategy and operating needs, driving further momentum in its business.

For the remaining Jacobs business, the benefits from the separation are equally compelling. Jacobs will streamline its business portfolio and transform itself into a higher-growth, higher-margin company more closely aligned with key global megatrends and growth sectors. This streamlined Jacobs is expected to increase its adjusted EBITDA margin by at least 300 bps through cost optimization, operating leverage, and a focus on higher-margin business activities. Jacobs will retain its innovative, next-generation data solutions and digital technologies business, which is part of its DVS segment and core to delivering digitally enabled critical infrastructure solutions to clients. Businesses remaining under the Jacobs logo are responsible for ~67% of the pre-separation company’s revenues.


Strong Fundamentals, Robust Delivery

Jacobs boasts excellent financial health with very low net debt, which has been significantly reduced over the past several years. Its stellar liquidity position is underscored by its robust current and quick ratios. The company’s debt is well-covered by operating cash flows, while the interest is covered by EBIT many times over. Jacobs’ capital efficiency metrics, such as returns on assets, equity, and invested capital, are in line with industry averages; the same can be said about its margins.

Over the past five years, J’s revenue has increased at a CAGR of 7.1%, while its adjusted earnings-per-share was a surging 53.4%. Over this period, annual revenues have increased by over ten billion dollars.

The company released its latest financial results on February 6th, reporting for the fiscal Q1 2024 (ended December 29th). The report featured a 7% year-over-year increase in adjusted net revenue and a 21% surge in adjusted earnings-per-share.

FQ1 revenue and EPS by far surpassed analysts’ estimates. In fact, the company beat EPS expectations in all quarters for which estimates were available, except on two occasions. In the quarter, Jacobs delivered $418M in cash flow from operations, up 38% y/y, and $401M in free cash flow, up 48% y/y. The company reiterated its outlook for fiscal 2024 adjusted EBITDA growth of 9% and adjusted EPS growth of 10%.


Total Return Outlook

Jacobs’ shares rose by just over 17% in the past three years after accounting for the significant weakness in the company’s and the industry’s stocks throughout 2022 and the first half of 2023. However, Jacobs has strongly rebounded from its recent low in May 2023, registering a 27% increase over the past 12 months. Notably, Jacobs’ stock features volatility levels that are much lower than its peers.

Despite the recent outperformance, the stock remains reasonably valued, trading below the Professional Services Industry’s average and at the bottom of the price range for its peers and competitors. In addition, based on projected cash flows, the stock is trading ~45% lower than its fair value, placing it in the value stock category.

While TipRanks-scored Top Analysts see an average upside of just 6% for the stock over the next 12 months, the company may well surprise on the upside, as it did multiple times in the past. Jacobs carries a TipRanks Smart Score rating of 8/10 (“Outperform”) with a “Strong Buy” recommendation:

Stock price appreciation is expected to continue to be supported by the company’s buybacks, which it has performed on an opportunistic, though fairly regular, basis. In January 2023, Jacobs’ Board approved a new share repurchase program, authorizing the purchase of up to $1 billion of Jacobs’ common stock through January 25, 2026. By the end of calendar 2023, the company had completed the repurchase of 1.48% of its common stock for $225 million.

Jacobs’ shareholders are compensated not only through stock price appreciation: the company has been paying dividends since 2017, increasing them every year since 2019. While its dividend yield is low at 0.73%, the company’s more-than-modest payout ratio, robust financial performance, and the stated alignment with shareholder interests allow for an outlook of further dividend growth.



Jacobs Solutions is a stable, profitable, well-managed business. Its steady earnings growth is underpinned by its leading position in all of its end markets. An ongoing strategic transformation is expected to expand its profit margins, enhancing value for stakeholders. The company is attractively valued and well-aligned with its shareholders, which makes it an enticing long-term investment opportunity. As such, we believe it can be a valuable addition to the Smart Investor portfolio.


New Sell: ON Semiconductor (ON)

ON Semiconductor Corp., aka onsemi, engages in the design, manufacturing, and marketing of a portfolio of semiconductors, semiconductor components, and sensors. onsemi’s main focus areas are automotive (50% of revenues) and industrial (30% of revenues) markets, although it also serves customers from the medical sector, aerospace and defense, 5G & cloud, and consumer electronics industries.

onsemi is a market leader in its niches, a well-managed and profitable business with stellar financial health and robust capital efficiency. However, since it is the world’s largest supplier of image sensors to the automotive market and is a leading producer of silicon carbide (SIC) chips for electric vehicles (EVs), its fortunes are intertwined with the industry.

This tight connection could be seen in ON’s latest quarterly results, specifically a decline in revenues and soft guidance for the current quarter. While a decline in demand from the automotive industry was expected, investors were disappointed by SIC demand weakness in the company’s EV business. The EV industry is going through a rough patch, and the outlook for this year continues to be highly uncertain. We are therefore concerned that it could be a drag on onsemi’s results into 2024. Therefore, we find it prudent to sell the stock for now, although we may reassess this decision in the future if we spot a resumed growth momentum in the EV market.1


Portfolio Stocks Under Review

This section will flag stocks that may be let go from the portfolio.

¤ Electronic Arts (EA): The videogame company remains under review for potential sale with low urgency, as we continue to watch the trends in gaming sales, which depend on the overall economic situation. EA is a financially healthy, well-run company, but its 2024 growth prospects depend on the market rebounding from last year’s weakness.


Charter Members of the 30% Winners Club

*The 30% Winners Club includes stocks from the Smart Investor Portfolio that have risen at least 30% since their purchase dates.

Our exclusive club’s ranks have expanded again, as Molina Healthcare (MOH), which fell below the 30% threshold last week on pressures experienced by the healthcare stocks, strongly rebounded over the past several days.

The Winners Club now includes 15 stocks: SMCI, GE, AVGO, ANET, CDW, ORCL, EME, STLA, TSM, AMAT, ULTA, JBL, MOH, PH, and GD.

The next in line to enter the Winners’ ranks are now CHKP and ITT with 29.3% and 28.2% respective gains since purchase. Will they close these minor gaps, or will someone else outrun them to the finish line?


What’s Next?

Our next commentary will come out on Wednesday, March 20th, before the market opens.

Until then – we wish you a world of investment success!

Access the full Smart Investor Archive, including all historical stock picks and original newsletters.


Portfolio Snapshot

New Portfolio Additions

Ticker Date Added Current Price
J Mar 13, 24 $149.18

New Portfolio Deletions

Ticker Date Added Current Price % Change
ON Jan 24, 24 $82.59 +8.03%

Current Portfolio Holdings

Ticker Date Added Current Price % Change
SMCI Nov 8, 23 $1163.00 +355.36%
GE Jul 27, 22 $167.46 +199.68%
AVGO Mar 22, 23 $1291.88 +104.76%
ANET Jun 21, 23 $281.86 +86.03%
CDW Jun 29, 22 $249.87 +58.07%
EME Nov 1, 23 $323.23 +56.63%
ORCL Dec 21, 22 $127.54 +56.49%
STLA Sep 6, 23 $28.18 +55.18%
TSM Aug 23, 23 $144.40 +53.96%
AMAT May 31, 23 $204.94 +53.74%
ULTA Nov 15, 23 $555.57 +37.13%
JBL Jul 5, 23 $149.60 +37.01%
PH Oct 11, 23 $538.28 +35.31%
GD Dec 22, 21 $274.65 +34.79%
MOH May 3, 23 $402.55 +34.39%
ITT Oct 18, 23 $127.28 +33.26%
CHKP Jul 19, 23 $164.56 +29.25%
CI Jul 12, 23 $343.94 +28.01%
APH Aug 9, 23 $110.60 +25.06%
ACN Aug 16, 23 $380.48 +23.68%
TXT Nov 29, 23 $91.73 +19.27%
VRTX Aug 2, 23 $412.45 +18.61%
CXT Oct 25, 23 $60.28 +16.46%
MCK Dec 13, 23 $531.24 +14.95%
AIT Dec 6, 23 $185.26 +12.46%
WRB Jan 31, 24 $85.63 +4.90%
FLEX Feb 21, 24 $28.93 +4.33%
FLT Jan 17, 24 $294.67 +3.76%
REGN Feb 7, 24 $970.57 +3.49%
ELV Mar 6, 24 $505.57 +1.45%
KOF Feb 14, 24 $98.39 +1.39%
AIZ Feb 28, 24 $181.12 -0.35%
EA Nov 22, 23 $136.02 -0.56%
CNC Jan 10, 24 $76.75 -1.62%



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