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Port in a Storm

By Thomas Scarlett on August 21, 2015

With the stock market as turbulent as it is today, a company that can count on a steady stream of revenue from government sources can provide some much-needed stability.

Tetra Tech (NASDAQ: TTEK) — a California-based company that provides consulting, engineering and technical services for the water, environment, energy, infrastructure, and natural resources industries – is having another strong year. This month alone, the firm has won two important government contracts that will add to its already strong revenue stream.

On August 10, the U.S. Agency for International Development (USAID) awarded the company a $20 million contract to improve fisheries management and enhance the health and resilience of Southeast Asia’s marine ecosystems. The region depends heavily on marine and coastal fisheries for food and economic growth, and fish stocks are in a state of decline.

The very next day, Tetra won a contract with the federal government to promote climate-resilient communities and protect biodiversity in West Africa. The region’s inland forests are also threatened by conversion to agricultural use and unsustainable land-use practices.

Even before these latest contracts, the company was paving a shining path to profits. Its most recent quarterly earnings report, issued on the last day of July, exceeded analysts’ expectations. Operating income in the quarter compared to last year’s third quarter was up 35%, and earnings per share were up 39% compared to the third quarter of fiscal 2014. Cash generated from operations was $109.3 million, up 88% compared to last year’s third quarter.

CEO Dan Batrack commented, “Our business delivered solid performance in the third quarter supported by our water and environmental services for our government and commercial clients. Since the end of last quarter, we were awarded $1.4 billion of new contract capacity with our U.S. federal government clients and backlog in our ongoing operations grew 6%.”

Tetra Tech’s clients include federal, state, and local government agencies in the US, as well as commercial and international clients. The company also has a growing presence in the energy sector, for pollution prevention and remediation.

Founded in 1966 and headquartered in Pasadena, California, Tetra Tech prepares facilities, infrastructure and supply chains for the worst—and comes to the rescue if the worst actually occurs.

For nearly five decades, Tetra Tech has responded to thousands of chemical, biological, radiological, nuclear, and explosive releases, as well as natural calamities such as hurricanes, tornadoes, floods, and earthquakes.

Notably, Tetra Tech supported the US Environmental Protection Agency (EPA) in 2005 with response and remediation services for environmental emergencies resulting from Hurricanes Katrina and Rita and the subsequent flooding in New Orleans, Louisiana.

Part of the company’s Katrina-related services included search and rescue, deploying as many as 65 responders to affected areas.

With the emergence of international markets that are interconnected and operate around the clock, companies increasingly rely on global supply chains to maximize efficiency. However, the vast scope of these supply chains makes them vulnerable to catastrophic disruption.

Tetra Tech is now involved in the establishment of tsunami warning centers commissioned by the US government.

Tetra Tech faces competition from a handful of giant engineering and construction firms, particularly Fluor Corp (NYSE: FLR), Halliburton Co (NYSE: HAL), and AECOM Technology Corp (NYSE: ACM). These companies are politically well connected and regularly obtain sizable amounts of government largesse, in addition to private sector clients.

However, Tetra Tech is the leader in crisis management, whereas the operations of its rivals are considerably more diffuse and their fortunes are more closely tied to the cyclical construction sector.

We think the recovery for this company has just begun. The stock is a buy up to 32.

Tom Scarlett is an investment analyst with Personal Finance.

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