2023-11-19 11:29:41 ET
Summary
- Tetra Tech Inc is an American consulting and engineering services firm specializing in water, environment, and sustainable infrastructure.
- In FY23 they achieved record high revenue, gross profit, operating profit, and net income.
- The company has shown impressive dividend growth and has a good track record of growth and capital allocation, but there are concerns about the sustainability of their acquirer strategy.
Tetra Tech Inc( TTEK ) is an American consulting and engineering services firm that IPO'd in 1991. They specialize in water, environment, and sustainable infrastructure. They employ 21,000 associates and in F2022 they worked on more than 80,000 projects, spanning over 100 countries on all continents.
Below is the revenue breakdown, their segments are Government Services Groups and Commercial/International Services Group:
Next is their long term share price performance:
dividend channel
It also certainly beat the market when bought at the right price:
dividend channel
Next we see their return metrics against peers:
Company | Revenue 10-Year CAGR | Median 10-Year ROE | Median 10-Year ROIC | EPS 10-Year CAGR | FCF 10-Year CAGR |
TTEK | 2.6% | 13.8% | 10.1% | 11.5% | 9.3% |
4.8% | 4.4% | 2.3% | n/a | 4.7% | |
3.2% | 7.6% | 6% | 5.4% | 6.1% | |
8.3% | 10.3% | 5.9% | 2% | 0.8% | |
4.7% | 8.7% | 7.2% | 2.4% | 7% | |
25.2% | 7.5% | 5.4% | 12% | 23.8% |
Capital Allocation
They have been a serial acquirer for many years now, and they also began emphasizing shareholder yield over the past decade. Below we can see how capital was allocated in USD millions:
Year | 2013 | 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 |
EBIT | 67 | 95 | 145 | 158 | 176 | 194 | 208 | 242 | 275 | 341 |
FCF | 110 | 108 | 309 | 130 | 128 | 167 | 192 | 250 | 296 | 326 |
Acquisitions | 171 | 30 | 12 | 83 | 8 | 33 | 84 | 68 | 85 | 49 |
Dividends | 9 | 18 | 20 | 22 | 24 | 30 | 35 | 40 | 46 | |
Repurchases | 4 | 56 | 90 | 82 | 81 | 61 | 100 | 117 | 60 | 200 |
Debt Repayment | 171 | 4 | 75 | 148 | 234 | 486 | 415 | 332 | 417 | 121 |
SBC | 9 | 10 | 11 | 13 | 13 | 20 | 18 | 19 | 23 | 26 |
Overall capital allocation has been good. They acquire many businesses without sinking themselves in debt, all while returning capital to shareholders. They’ve had Impressive dividend growth with an 8-year CAGR of 22%. The best dividend growth is always observed in hindsight though.
There are only a few moves to be made with FCF, and sometimes companies seem to do a little bit of everything just because they can. Whether this works or not is shown in the results of how much FCF/share has grown. This is a case where it has worked out well and I don’t mind how they are allocating.
Risk
The fundamental business risk is low, and the stock isn't overly cyclical. This leaves the biggest risks being capital allocation and overpaying. As mentioned in the last section, I would give them a good score on allocating capital so far. The issue is that the serial acquirer strategy can and will reach a limit to adding value.
Q4 Earnings
TTEK had a great quarter from an earnings perspective, with its highest beating of EPS in recent years.
In FY23, TTEK achieved record highs in revenue, gross profit, operating profit, and net income. I don’t anticipate more record highs for the next couple of quarters, but the company is clearly improving in quality over time.
Valuation
Share prices peaked in November of 2021, and fell 32% in summer of 2022. Shares are currently 10% down from that peak. Let's take a look at the historical multiples, followed by multiples comp:
macrotrends macrotrends macrotrends
Company | EV/Sales | EV/EBITDA | EV/FCF | P/B | Div Yield |
TTEK | 2.2 | 21.2 | 31.9 | 5.8 | 0.6% |
ACM | 0.9 | 13.6 | 21.7 | 4.5 | 1% |
J | 1.2 | 13.3 | 21.2 | 2.3 | 0.7% |
STN | 1.9 | 20.6 | 43.8 | 4.5 | 0.8% |
ARCVF | 1 | 11.1 | 37.6 | 3.6 | 1.7% |
WSPOF | 1.9 | 15.7 | 38.4 | 3.9 | 0.7% |
There isn’t any discount obvious from a multiples perspective. They aren’t lower than peers, and historically the multiples are expanding over the long term.
Next is the dcf model:
money chimp
I’ve used a pretty conservative growth estimate in the model. I don’t consider current earnings to be artificially high, but I do expect mean reversion to bring them down as the M&A strategy will likely lose its potency over time. Clearly I see the company as overvalued, but it’s worth paying attention to, as the quality has improved as time has gone on. I give this stock a hold rating.
Since shareholder yield is an important part of the returns at this point, it’s ideal to lock in higher dividend yields whenever you can. The current yield is paltry at 0.6% however, so even with a modest drop in share price, it would take a lot more to see dividend yield move up meaningfully.
Conclusion
TTEK has been a good growth story for quite a while now, and the company is firing on all cylinders. They’ve got a good track record of growth and capital allocation, and the market is rewarding them with higher multiples.
My biggest concern is that the acquirer strategy will lose steam in the years ahead, thus slowing growth. That coupled with overvaluation forces me to avoid the stock for now. Overall I like the fact that they have improved in quality over time and have returned capital to shareholders while growing at the same time.
For further details see:
Tetra Tech: Improving Business, Stock Overvalued