• Tetra Tech: The Right Path To Undeterred Success


    Despite the restrictions caused by the pandemic, Tetra Tech, Inc. (NASDAQ:TTEK) maintained its impressive performance in the previous fiscal year. Its sound financials helped the company sustain its continuous dividend growth throughout the years. Moreover, its stock continues to do well in the market as the bullish trend and undervaluation remain. Meanwhile, the company may enjoy more growth opportunities, given the achievements it had when FY 2021 opened.

    Analyzing The Sound Financials of Tetra Tech, Inc.

    Operating Revenue and Operating Costs

    The increasing demand and quality of services matched with the strategic pricing helped Tetra Tech, Inc. Generate an increasing amount of operating revenue. As the company got larger, its operations increased and became stronger. With this, it had substantially grown over the years.

    From 2010 to 2019, the operating revenue has already increased considerably. Despite the occasional ups and downs, the increase has been visible. From $2.21 billion in 2010, it rose by almost $500 million and reached $2.7 billion in 2012. In 2013-2015, it continuously decreased from $2.61 billion to $2.3 billion. It was driven by the wind-down of the Restructuring and Construction Management as part of the company's strategy to increase efficiency and achieve long-term growth. Since its completion in 2016, it bounced back to $2.54 billion and continuously climbed up to $3.1 billion in 2019. Also, the upward trend became smoother which showed undeterred growth. With this, it had average revenue growth of 3.3% every year as it already changed by $900 million. Indeed, one can observe the strength of the company's operations since it maintained its revenue above $2 billion despite the wind-down while keeping the decrease manageable to sustain its growth. Also, it easily adjusted as it easily bounced back and growth became more substantial since then.

    Meanwhile, FY 2020 has been a game-changer as the pandemic came and caused disruptions in different industries. Tetra Tech, Inc. Was not an exception as three-quarters of its operations witnessed its impact. During 1Q, revenue growth was substantial from $720 million to $840 million. During the latter part of 2Q, the pandemic struck many businesses and quickly caused challenges to their operations. Despite this, the operating revenue still increased by 11%. With this, the company had an impressive performance during the first half. The impact of the pandemic was more visible during 3Q and 4Q since the restrictions were at the peak then. As a result, the accumulated value of $1.45 billion was 9% lower than their comparative quarters. Nevertheless, the revenue remained adequate to sustain its operations, and the decrease remained manageable. With this, the operating revenue in FY 2020 amounted to $2.98 billion and only decreased by $120 million. One can see how the company was able to cope with the current situation. It tried to keep its operations at its best despite the quarantine measures. It remained intact and unfazed, given the substantial amount it generated. As less strict measures are being implemented and everything is gradually going back to normal, the operations may become better. The Linear Trend Analysis adheres to the observation as it estimated the operating revenue to rise from $3.2 billion to $3.7 billion for the following years.

    On the other hand, the operating costs followed the direction of the operating revenue. It exactly mirrors its upward and downward movement which showed the expansion and contraction of its operations. Also, the value was kept lower while the gap became wider which could suggest that the efficiency of the company has been increasing over the years. After the wind-down, their gap became even wider. From $1.9 billion in 2010, it increased to $2.7 billion in 2019 so Gross Profit increased from $310 billion to $410 billion. It showed that as time went by the company managed its costs well while increasing its production to realize higher earnings. Indeed, the wind-down was a strategic move on its part. Moreover, as the pandemic hit the industry, the operations of the company contracted but the efficiency remained. As a result, the operating costs remained lower at $2.55 billion while Gross Profit increased to $440 million. For the next few years, as the situation gets better, the operations of the company may grow again. With this, the operating costs may increase again from $2.76 billion to $3.1 billion. But as the increasing efficiency suggests, gross profit may climb from $450 million to $600 million.

    Taken from MarketWatch: Tetra Tech, Inc.'s Annual Financials

    Taken from MarketWatch: Tetra Tech, Inc.'s Quarterly Financials

    Net Income

    Before and during the wind-down of the Restructuring and Construction Management, extraordinary expenses were more frequent and caused substantial changes in non-core operations of the company. The continuous increase in net income from $76.8 million to $104 million in 2010-2012 was cut short as it plunged to -$2.1 million in 2013. The sharp change happened when the wind-down started. It considerably increased to $108 million a year after before decreasing again to $39 million in 2015. Since then, income growth has resumed. From $84 million in 2016, it continuously increased to $160 million in 2019. The smoother upward trend of both the operating revenue and net income for the last five years showed consistency and efficiency in both core and non-core operations. Also, it further confirmed the observation that the wind-down was advantageous for the company as its viability increased further.

    Meanwhile, FY 2020 showed increased efficiency even in non-core operations. 1Q 2020 had a higher net income at $47 million compared to $42 million in the previous fiscal year since the pandemic has not entered the US yet then. As it hit the industries in 2Q and 3Q, it increased the unusual charges. But since the company maintained its strong operations, it handled both its core and non-core operations efficiently. With this, Profit Before Tax during the two quarters was also higher than their comparative quarters in 2019. But since tax drastically increased, especially in 3Q, net income fell but remained high at $36 million and $46 million, respectively. Moreover, as the company already adjusted to the situation it kept the revenue within the range while increasing efficiency which caused the increase in operating income. Also, its non-core operations did not have substantial changes. As a result, it dramatically increased to $45 million. It was the highest value in 4Q since 2017-2019 at $35 million, $29 million, and $12 million, respectively. With this, net income as FY 2020 ended went higher to $174 million which showed an 8% increase. Now that everything is slowly adapting to the situation and the operations get better, the efficiency may improve as well. As estimated, net income may reach $195 million in FY 2021 and even higher at $276 million in 2025.

    Taken from MarketWatch: Annual Financials

    Taken from MarketWatch: Quarterly Financials

    Return on Asset

    Since Tetra Tech, Inc. Operates by providing consulting and engineering services, intangibles, fixed assets, cash, and receivables comprise its assets. The changes in the trend of the company's operations can be verified in the Balance Sheet to ensure consistency. The trend of assets has been identical to the operating revenue and similar to net income which showed consistency in its sound financial health. The identical trend before and during the wind-down showed that the changes in assets had a big impact on the company's operations. Since 2016, the trend of assets became smoother and increasing like the operating revenue and net income which confirmed the positive impact of the wind-down. Also, it showed that the continuous increase in assets helped the company generate more revenue and earnings. And the increasing earnings, in turn, helped the company sustain its operations. With this, one can say that the viability of the company has been consistent with long-term sustainability which shows that the company remained adequate to operate for a long period.

    To measure how the changes in assets changed the viability of the company, one may check Return on Asset (ROA). Before the wind-down, the company has been realizing adequate earnings relative to its assets as ROA remained above 5%. When it restructured ROA fell to -0.1%-2% in 2013-2015. After the wind-down, ROA substantially increased to 4.6% before increasing again to 6%-7%. The disruptions in the trend show the sharp changes caused by the wind-down. Meanwhile, the increasing ROA confirmed the increasing profitability of the company as the trend of net income became smoother than assets. Indeed, one can observe the increased efficiency in the operations. Despite the changes in assets, net income has been consistently increasing. In FY 2020, amidst the pandemic, the assets still increased which showed the company's resilience and capacity to operate. As a result, net income increased further which kept ROA above 7%. For the next few years, the estimation showed more opportunities for growth as things slowly cope with the situation. Hence, ROA may further increase to 8% to 9%.

    Taken from MarketWatch: Annual Financials

    Return on Equity

    Equity is an important account in the Balance Sheet since it helps the company leverage its increasing operations and shows what is left after paying all payables and borrowings. Moreover, it focuses on the interest of the shareholders and helps them track their earnings using Return on Equity (ROE). ROE also had an identical trend which showed consistency with the changes in assets and net income. The increasing solvency showed that the company had enough to cover all its liabilities while remaining sound to increase its capacity to operate. With this, one can understand the sustainability of the company's operations as increasing equity helped the company add assets and realize higher earnings. The upward trend of ROE showed the increasing viability of equity. From 10% in 2010, it became lower during the wind-down before increasing again to 16%-17% since 2016. Moreover, since the values of ROA and ROE have increased and remained close to one another showed that the company handled its financial leverage. It has maintained the balance between borrowings and equity. For the next few years, as earnings may increase faster, ROE may rise to 19% and the balance in the financial leverage may be maintained.

    Moreover, to further confirm how much the company's earnings can sustain its growth, one may check its Sustainable Growth Rate (SGR). Since the dividends that have been distributed were 21% of the company's earnings, the amount left was 79%. With its ROE of 17%, SGR was 13%. It shows that the company can still suffice its growth by 13% without increasing its financial leverage.

    Taken from MarketWatch: Annual Financials

    Nurturing Investors' Growth

    Dividends Per Share

    Tetra Tech, Inc. May be a newbie to dividend payments but its generosity since it started in 2014 did not falter. In just a few years, the dividends per share more than quadrupled with an average annual growth rate of 20%. Despite the wind-down and lower net income, the company was able to distribute dividends at $0.14 per share before doubling to $0.30 in 2015. In 2016 and 2017, the growth was slower at $0.34 and $0.38 but accelerated 2018-2020 at $0.44, $0.54, and $0.64 per share, respectively. The rapid growth was driven by the continuous increase in net income which remained higher despite the pandemic. The good condition of its operations also raised the dividends. Meanwhile, as things are expected to get better for the next few years, the dividends may go up. The computation using both the Dividend Growth Model and the Linear Trend Analysis agrees as it estimated the dividends from $0.74 per share to $0.90 per share.

    Taken from Nasdaq: Dividend History

    Dividends, Net Income, and Free Cash Flow

    Since it started distributing its dividend payments, the company's earnings remained adequate to sustain its growth and the operations of the company. In 2013-2015, the company wound down a segment that resulted in lower earnings but the company was able to distribute dividends. After the wind-down, growth in earnings became more apparent and large enough to cover all its financial obligations for the period. Nevertheless, the dividend remained relatively lower since the Dividend Payout Ratio remained at 10%-20%. In 2020, it became more substantial at 21%. While its value relative to net income was low, one can still observe that the dividend payments have increased substantially, given that it just recently started. Moreover, as the dividends may increase faster, the Dividend Payout Ratio may increase from 23% to 24% for the next few years.

    Likewise, Free Cash Flow (FCF) showed the company's adequacy with its generally increasing trend over the past decade. Also, it confirmed the sustainability and consistency of earnings since it also accounts for cash inflows from operating assets and liabilities, especially Capital Expenditure ((CapEx)). Since fixed assets remained a substantial part of assets, CapEx remained high which has been important to sustaining operations for a long period. Given the increased earnings and cash inflows from the changes in assets and liabilities, FCF has been increasing over the years. From $107 million, it already doubled and amounted to $250 million in 2020. The high amount of FCF showed the high capacity of the company to pay the dividends and borrowings for the period and sustain the increase in operations. For the next few years, like net income, it will also increase and become more adequate at $310 million.

    Taken from MarketWatch: Annual Financials and Nasdaq: Dividend History

    Stock Price

    The bullish trend of the stock price has been visible since it hit the bottom at $66.74 last March 23. Despite the overvaluation as suggested by the high PE Ratio of 38.40, the stock continues to perform well. It must be driven by the impressive FY 2020 results and the partnerships that the company won as FY 2021 started. To confirm if the current price is ideal, one may also check and estimate it in terms of dividend growth using the Dividend Discount Model.

    Current Price: $121.35

    Average Dividend Growth: 0.171999927

    Estimated Dividends Per Share: $0.74

    Cost of Capital Equity: 0.1780979905

    Derived Value: $142.2221911 or $142.20

    Given this, the model suggests undervaluation. It agrees with the bullish trend and the price may continue to increase to the derived value. Nevertheless, both the PE Ratio and Dividend Discount Model are limited ways to assess the stock price. Other factors that may either cause further growth or disruptions and even those that have an impact on the market must be considered.

    Opportunities for Further Growth

    Tetra Tech, Inc. Acquired BlueWater Federal Solutions

    Before FY 2020 ended, Tetra Tech, Inc. Announced its acquisition of BlueWater, Inc. The said company is a provider of information technology systems and services that specializes in cybersecurity, development of federal enterprise systems for US government clients such as the Department of Energy, Department of National Defense, and Federal Emergency Management Agency.

    While it shows the capacity of the company to expand its operations, it demonstrates its ability to integrate technology and analytics to better deliver its engineering services like water, environment, and infrastructure solutions. It's strategic on the company's side since it deals with consulting and engineering services so integrating it with high-end technology and analytics may further stimulate its operations. Also, it has been dealing with the government sector so adding BlueWater won't be a problem with the company. It may increase its revenue and reduce costs as the operations may improve and capture the demand from BlueWater's customers. An Increase in popularity may be expected. Its dedication to environmental solutions may start partnerships or receive investments from the other larger businesses, the government, and other institutions that concern with the environment, especially climate finance is being prioritized by many countries. As everything is slowly getting better, more companies are reopening and employees getting hired again which improves the market condition. Hence, the demand for its services may rise.

    Tetra Tech Wins Services Contracts

    FY 2021 might just have started last month but no time would be wasted with Tetra Tech, Inc. As it won multiple services contracts from companies and institutions such as the US Agency for International Development (USAID), US Army Corps of Engineers (USACE), and Federal Agency Management Agency (FEDA). The addition of BlueWater could have helped it since FEDA has long been its client. Moreover, it has been working on water, infrastructure, and environmental solutions and dealing with government agencies which made it a good fit for the job. As it further increases its revenue and earnings, its partnership with the government also increases its popularity to capture the attention and trust of many possible clients. Hence, demand may rise which may stimulate revenue and earnings growth and entice partnerships and investments.

    Key Takeaways

    The pandemic may be still taking its toll, but the market has adjusted and is gradually going back to normal. Many businesses have reopened and employees have been hired again. Tetra Tech, Inc. Was not an exception when the pandemic hit the market, but it remained still and coped with it, especially in 4Q.

    Short-term Investors: Its stock has been performing well. The bullish trend persists even if the PE Ratio suggests otherwise. The stock agrees with its impressive performance and the milestones it had as FY 2021 opened. Moreover, the Dividend Discount Model shows undervaluation when the price is estimated with dividend growth. Given the current trend of the price and the company's performance, investing here is a good idea.

    Long-term Investors: The company continues to expand. It was visible in 2Q 2020 when fixed assets and intangibles sharply increased. The addition of BlueWater in 4Q 2020 confirmed this. Despite the restructuring it did before, its financial health remained sound. When the pandemic came, it remained still and adjusted. Its sales may have decreased a bit but its efficiency increased which lessened the cost and increased its earnings. It shows that despite internal and external changes, the company could handle its operations while remaining adequate. Being a Dividend Challenger, the company may still have to prove its commitment to its shareholders since the dividends are not substantial relative to net income but the absolute value and the growth must be considered. With the current performance of the company, the possibility of a dividend cut may be zero. Long-term growth and security may be guaranteed by the company.

    Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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