Here’s Why Giverny Capital Sold its Jacobs Engineering Group (J) Position

Giverny Capital, an asset management firm, published its third-quarter 2021 investor letter – a copy of which can be downloaded here. A quarterly net return of 0.53% was delivered by the fund for the third quarter of 2021, slightly below its benchmark, the S&P 500 Index, which delivered a 0.58% gain for the same period. You can take a look at the fund’s top 5 holdings to have an idea about their best picks for 2021.

Giverny Capital Asset Management, in its Q3 2021 investor letter, mentioned Jacobs Engineering Group Inc. (NYSE: J) and discussed its stance on the firm. Jacobs Engineering Group Inc. is a Dallas, Texas-based construction company with a $19.1 billion market capitalization. J delivered a 34.52% return since the beginning of the year, while its 12-month returns are up by 40.24%. The stock closed at $146.57 per share on November 22, 2021.

Here is what Giverny Capital Asset Management has to say about Jacobs Engineering Group Inc.  in its Q3 2021 investor letter:

“We exited our holding in Jacobs Engineering during the quarter. Jacobs is a terrific company and I have no doubt it will continue to perform well under the leadership of CEO Steve Demetriou. Over the last few years, Demetriou has repositioned Jacobs out of petrochemical engineering, which is prone to boom-and-bust cycles, and into more steadily growing sectors like environmental, infrastructure and life sciences. If the US actually embarks on a badly-needed infrastructure investment program, Jacobs should receive a lot of new work.

That said, civil engineering is a good-not-great business. Even a best-of-breed firm like Jacobs earns relatively low returns on capital and modest profit margins. Jacobs essentially sells the labor hours of engineers to clients who generally are putting work out for bid. Demand for engineering projects ebbs
and flows, but because engineers have specialized skill sets, it is not so easy to hire and fire talent to adjust to demand. In slow periods margins often contract as Jacobs pays skilled people who are working below capacity.

Jacobs’ current financial returns are at historically high levels. As Jacobs rose to roughly 19x next year’s earnings, or $135 against a consensus estimate of $7.00, I decided to rotate our capital into a business that trades for a lower PE multiple and has, in my opinion, a better growth trajectory…” (Click here to see the full text)

Based on our calculations, Jacobs Engineering Group Inc. (NYSE: J) was not able to clinch a spot in our list of the 30 Most Popular Stocks Among Hedge Funds. J was in 20 hedge fund portfolios at the end of the third quarter of 2021, compared to 29 funds in the previous quarter. Jacobs Engineering Group Inc. (NYSE: J) delivered a 10.25% return in the past 3 months.

Disclosure: None. This article is originally published at Insider Monkey.