Environment Meets Data Mining

Consulting and engineering services provider Tetra Tech (TTEK:  Nasdaq) is expected to report financial results for its fiscal second quarter ending March 2019, on Wednesday May 1^st after the market close.  A conference call is scheduled for the next morning is likely to focus on Tetra Tech’s acquisition on eGlobalTech last month.  The deal takes Tetra Tech deeper into information technology and we anticipate questions about how eGlobalTech is expected to mesh with Tetra Tech’s roots in water, energy and environmental projects.

Tetra Tech Annual Report

Based in Virginia, eGlobalTech offers information technology solutions with a focus on cybersecurity.  The company has competencies in data science, artificial intelligence and cloud computing.  Apparently, Tetra Tech management sees eGlobalTech’s talents as vital for their consulting practice, adding new solutions for their clients that leverage artificial intelligence or data analytics as examples. 

Plans are to fold eGlobalTech into Tetra Tech’s Government Services Group, which provides consulting and engineering services to federal, state and local governments.  The company gets involved in water reclamation, waste management, environmental restoration, and infrastructure projects.  Additionally, Tetra Tech gets involved in civil infrastructure projects such as transportation or power or water utilities.

While eGlobalTech’s IT orientation may seem apart from Tetra Tech’s engineering focus, the acquired operation may fit well into the Government segment.  In February 2019, eGlobalTech announced a new master contract and the National Association of State Procurement Officers that represents state and local governments.  eGlobalTech will offer NASPO members cloud computing services and help government agencies migrate to the cloud to reduce costs and improve efficiency.     

The eGlobalTech transaction follows on the heels of two other deals that demonstrate Tetra Tech management’s strategy for accumulating expertise.  In October 2017, Tetra Tech acquired Glumac, a provider of sustainable infrastructure design services.  Glumac brought in knowhow in energy and environmental design and ‘net-zero’ infrastructure.  More recently, in January 2018, Tetra Tech bought BridgeNet International, a provider of aviation technology solutions.  BridgeNet focuses on aerospace data analytics and three-dimensional airspace visualization.  The company services both federal government and commercial clients.

Those previous two deals helped drive Tetra Tech total sales to $2.2 billion in the twelve months ended December 2018.  The company delivered 9.3% operating profit and converted 9.9% of sales to operating cash flow.  Strong cash flow supports a modest debt level as measured by a 27.6% debt-to-equity ratio.  Tetra Tech also maintains a dividend that is represents a current yield of 0.8%.

Growth by acquisition has worked well for Tetra Tech.  The company has clocked in 13.6% annual growth over the past five years.  Analysts are apparently looking for a continuation of the trend.  Projected growth is 15% over the next five years. 

The consensus estimate for Tetra Tech’s fiscal second quarter is for $0.63 in earnings per share on $552.6 million in total sales.  The sales hurdle represents 3.8% year-over-year growth, while the earnings estimate implies a more impressive 16% growth rate.  Tetra Tech management appears to have done a good job of conditioning expectations for its operations and the company has handily beat the consensus estimate in each of the last four quarters.

Tetra Tech share price has been on a strong upward climb since early February 2019 following report of year-end financial results.  In the last two weeks the shares have moved up above a line of volume-related price support/resistance at the $60.00 price level.  In our view, only a very disappointing development could bring the stock back down below this level.  However, there could be new interest as a consequence of the earnings report and that could push the stock higher.

We continue to rate TTEK at Technical Buy with a $67.00 price a target.  We acknowledge that the stock is near our price target already and is well within the Trim range of our trading guide.  We suggest traders consider taking profits as appropriate at the present prices and wait for periods of trading weakness to rebuild positions.  We will be returning to our earnings estimate and price target based on management’s commentary on its recent acquisition.

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. Crystal Equity Research has a Technical Buy rating on TTEK shares as a part of the Crystal Reports research publication.