Tuesday, May 16, 2017

Tetra Tech's Engineering Play

Tetra Tech, Inc. (TTEK:  NYSE) provides engineering, construction and technology solutions to industry, commerce, governments and international development agencies around the world.  The company’s technicians and engineers have earned a stellar reputation for water cleanup, resource management and environmental remediation.  In early May 2017, a Tetra Tech subsidiary was chosen to by the Australian Department of Defence to provide supportive services for infrastructure development.  The contract will run five years and represents an extension of an existing five-year agreement.  The Australia contract extension is the latest in a string of new and extended relationships that help drive Tetra Tech’s top-line.  The company reports revenue in three segments:  1) water, environmental and infrastructure, 2) resource management and energy, and 3) remediation and construction management.

IHNCTetra Tech is heavily dependent upon the U.S. Defense Department and international development agencies.  In April 2017, the company was awarded multiple contracts by the U.S. Navy for remediation of Navy and Marine Corps installations.  The contracts will be shared with five other companies that will work with Tetra Tech in remediation of radiological contaminants at various sites around the U.S.  The company is also a frequent recipient of USAID (U.S. Agency for International Development) contracts, such as the recent award of a contract valued at $57 million to promote the delivery of clean energy services in Pakistan.

The pace of new contract awards is driven in part by a worldwide need to improve water supplies and clean up environmental damage.  Just as in the United States, infrastructure around the world is badly in need of repair and expansion to accommodate increasing population.  Tetra Tech’s backlog at the end of April 2017 was $2.5 billion composed of a mix of government, industry and commercial contracts.  Backlog increased about 5% over the past year.   

Tetra Tech has been able to tap into world demand in part through strategic acquisitions.  In January 2016, the company acquired Coffey International Ltd. based in Sydney, Australia.  Coffey has a successful history in Australia and Asia Pacific and it is through the Coffey subsidiary’s name that Tetra Tech now has a prominent presence in the region.

The company has also used acquisitions as a means to fill out its portfolio of expertise and technology solutions. In May 2016, Tetra Tech acquired Virginia-based INDUS Corporation, a technology solutions firm with a particular talent for water data analytics and geospatial analysis.  INDUS works primarily for U.S. government agencies, but its technology could be used as easily for private industry and business.  The year before the company had acquired Cornerstone Environmental Group, a privately-held environmental engineering firm with particular expertise in solid waste management. 

With a penchant for buying its place in the market, Tetra Tech’s management needs strong financial resources.  The company invested $123.3 million in cash for acquisitions in just the past three years.  It is fortunate that Tetra Tech has a history of strong profitability and cash flow generation.  In the twelve months ending March 2017, the company reported revenue totaling $2 billion and providing $110 million in net income or $1.89 per share.  Operations generated $162 million in cash flow during the same twelve month period, representing a sales-to-cash conversion rate of 8.1%.

Tetra Tech has laid on debt to accomplish its objectives.  At the end of March 2017, long-term debt, including portions due within the next year, totaled $345.5 million.  This represented a debt-to-equity ratio of 0.38, compared to 0.44 for the consulting services industry.  Interest coverage by cash operating income was 21.35 times, which also compares well to the 27.36 average interest coverage ratio of the business services sector.

Shares of Tetra Tech are currently priced at 17.1 times the consensus estimate for fiscal year 2017.  Analysts are looking for $2.22 in earnings per share on $2.1 billion in total sales.  With a forward dividend yield near 0.9% through a dividend of $0.40 per year, the stock may seem appealing to investors looking for a stake in natural resource management.  Nonetheless, Crystal Equity Research currently has a Trim rating on TTEK shares and a $45 price target.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  

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