Does Jacobs Engineering Group Inc (NYSE: JEC) Sales Multiple Signal A Selling Opportunity?

in VALUATION MULTIPLES by

Jacobs Engineering Group Inc. (NYSE: JEC) shares currently trade at 0.9x its trailing revenue which is lower than the Industrials sector median of 1.5x. While this makes JEC look like a stock to add to your portfolio, equity investors might change their mind after taking a closer look at the assumptions behind the EV / Sales ratio. In this article, I define how to calculate a Sales Multiple and what to keep an eye out for when applying it in a comparable companies analysis.


Jacobs Engineering Comparable Companies Analysis

A comparable companies analysis, also known as a multiples valuation, determines the value of a subject company by benchmarking its financial performance against similar public companies or peers. We can conclude if a company looks undervalued or overvalued relative to its peers by comparing metrics like growth, profit margin, and valuation ratios.

Enterprise Value-to-Revenue Multiple, also known as the EV / Sales ratio or a Sales Multiple, measures the dollars in Enterprise Value for each dollar of revenue. To determine if a company is expensive, it’s far more useful to compare EV / Sales multiples than the absolute stock price. The general formula behind a Sales Multiples valuation model is the following:

Enterprise Value = Revenue x Selected Multiple

The EV / Sales ratio by itself is not very helpful at all. It is only useful when comparing it to other companies that are considered similar to the subject company. The basic idea is that companies with similar characteristics should trade at similar multiples, all other things being equal. Therefore, we can come to a conclusion about the stock if the ratios are different. In the chart below, I compare Jacobs Engineering’s EV / Sales ratio to its peer group that includes AECOM (NYSE: ACM), Fluor Corporation (NYSE: FLR), MasTec, Inc. (NYSE: MTZ) and Quanta Services, Inc. (NYSE: PWR).

JEC Sales Multiple vs Peers Chartsource: finbox.io Benchmarks: Sales Multiples

Since Jacobs Engineering’s sales multiple of 0.9x is higher than the median of its peers (0.5x), it means that investors are paying more than they should for each dollar of JEC’s revenue. As such, our analysis shows that JEC represents an overvalued stock. In fact, finbox.io’s Sales Multiples Model calculates a fair value of $39.42 per share which implies -39.7% downside.

JEC EV / Sales Valuation Calculation

I selected a fair multiple of 0.6x in my analysis by averaging Jacobs Engineering’s current EV / Sales ratio with its peer group.


Are Comps Really Comparable?

Before concluding that Jacobs Engineering should be banished from your portfolio, it is important to understand that our conclusion rests on two important assumptions.

(1) the selected peer group actually contains companies that truly are similar to Jacobs Engineering, and

(2) the selected peer group stocks are being fairly valued by the market.

If the first assumption is not accurate, the difference in sales multiples could be due to a variety of factors. For example, if you accidentally compare Jacobs Engineering with lower growth companies, then its sales multiple would naturally be higher than its peers since investors reward high growth stocks with a higher price. It’s also important to note that EV / Sales ratios are highly correlated with profit margins so differences in EBITDA margin often explain differences in valuation.

JEC revenue Growth and Margins vs Peers Tablesource: sales multiples model

Now if the second assumption does not hold true, Jacobs Engineering’s higher multiple may be because firms in our peer group are being undervalued by the market.


How This Impacts Shareholders

As a shareholder, you may have already conducted fundamental analysis on the stock so its current overvaluation could signal a potential selling opportunity to reduce your exposure to JEC. However, keep in mind the limitations of a sales multiples valuation when making an investment decision. There are a variety of other fundamental factors that I have not taken into consideration in this article. If you have not done so already, I highly recommend that you complete your research on Jacobs Engineering by taking a look at the following:

Valuation Metrics: how much upside do shares of Jacobs Engineering have based on Wall Street’s consensus price target? Take a look at our analyst upside data explorer that compares the company’s upside relative to its peers.

Risk Metrics: how is Jacobs Engineering’s financial health? Find out by viewing our financial leverage data metric which plots the dollars in total assets for each dollar of common equity over time.

Efficiency Metrics: is management becoming more or less efficient over time? Find out by analyzing the company’s asset turnover ratio which measures the dollars in revenue a company generates per dollar of assets.

As of this writing, I did not hold a position in any of the aforementioned securities and this is not a buy or sell recommendation on any security mentioned.

Expertise: Valuation, financial statement analysis. Matt Hogan is also a co-founder of finbox.io. His expertise is in investment decision making. Prior to finbox.io, Matt worked for an investment banking group providing fairness opinions in connection to stock acquisitions. He spent much of his time building valuation models to help clients determine an asset’s fair value. He believes that these same valuation models should be used by all investors before buying or selling a stock. His work is frequently published at InvestorPlace, Benzinga, ValueWalk, AAII, Barron’s, Seeking Alpha and investing.com. Matt can be reached at matt@finbox.io or at +1 (516) 778-6257.

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