TTEK

Tetra Tech is a highend consulting and engineering firm centered on water, environment, sustainable infrastructure and applied digital solutions. Work is delivered under a mix of fixedprice, timeandmaterials and costplus contracts; the balance skews toward labordriven net revenue over passthroughs, which is why "net revenue" is the right lens for margin quality and cash conversion. In FY24 (yearend Sept), revenue was $5.199 Bn (+15% y/y), with the client mix roughly 32% U.S. federal, 12% state & local, 18% U.S. commercial, and 38% international; USAID alone was 13% of FY24 revenue, a concentration management addressed headon this year. Contract type mix was ~39% fixed price, 45% T&M, 16% costplus.

The shares are ~$3334 today. After a 5for1 split in Sept2024, basic shares outstanding are ~263 Mn; at $33.8, market cap is ~USD 8.9 Bn. Gross debt is ~$862 Mn, cash is ~$243 Mn, so net debt is ~USD 620 Mn; management shows TTM netdebt/EBITDA at ~0.96x, consistent with an assetlight model and strong operating cash generation. Enterprise value is roughly USD 9.5 Bn on my math.

Three things define the franchise. First, Tetra Tech is the #1 water firm, repeatedly recognized by ENRclients hire them for upstream science, planning, modeling and program leadership rather than commodity EPC. Second, they are embedded on multiyear federal and utility frameworks (USACE/NAVFAC, EPA/Interior, UK water companies), which feed recurring task orders and high utilization. Third, they have been deliberately layering digital/automation (e.g., Convergence Controls & Engineering, SAGE Industrial) into water/industrial projects to capture highervalue work and make solutions stickier.

Recent reported results corroborate the "resilience + mix upgrade" story. In Q3 FY25, exUSAID/State, revenue grew ~10% y/y, operating income +37%, EPS +46%, backlog exUSAID/DoS rose to $4.15 Bn, and operating cash flow was $350 Mn for the quarter (helped by USAID collections), taking TTM operating cash flow to $462 Mn. Management raised FY25 adjusted EPS guidance to $1.491.54 even after removing USAID from the plan.

The share price path explains the psychology. Into the U.S. election the stock traded in the low$50s (postsplit basis), then sold off sharply as the new administration paused and then canceled most USAID programs. Peaktotrough, the stock fell ~45% before stabilizing; it's still down meaningfully versus preelection levels. Investors extrapolated the USAID shock into a broader impairment of federal work and earnings power. But USAID exposure is the lowmargin federal subset; management already removed the contracts from backlog, took a ~$92 Mn goodwill impairment on the impacted Global Development Services unit, settled the longrunning Hunters Point litigation (with a $115 Mn charge), and guided FY25 EPS higher exUSAID/DoS. That's an unusual cluster of "bad news" absorbed while raising the baseexactly the kind of setup where narrative lags the data.

This isn't handwaving. The policy facts are on the record: Executive Order 14169 instituted a 90day pause, followed by cancellation of ~83% of USAID programs; Tetra Tech was notified "virtually all" of its USAID contracts were terminated for convenience. The company's 10Q explicitly links the sharp backlog drop to that cancellation and explains why operating cash flow jumped (collection of terminated USAID receivables).

The crux is simple: the market priced a structural demand hole; the printed numbers show a mixupgrade and resilient demand in the rest of the portfolio. ExUSAID/DoS, federal and state & local have been growing, segment margins are expanding 130230 bps y/y, and the backlog exUSAID/DoS is up yearonyear and sequentiallyyet the multiple still embeds "show me." That disconnect is my opportunity.

Tetra Tech's execution through cycles is a core part of the long. The RPS Group acquisition in 2023 expanded UK/Europe scale and has been contributing to CIG (Commercial/International) while management methodically lifts margins toward the corporate target. More recently they've focused on boltons that shift mix higher (Convergence Controls & Engineering in 2024; SAGE Industrial in 2025) and they continued returning capital: dividend up +12% y/y, Q2 repurchases of $150 Mn, and authorization expanded by another $500 Mn. Liquidity was refreshed with a $1.5 Bn credit agreement to 2030. Leverage sits around 1x, leaving room to continue tuckins without stressing the balance sheet.

Importantly, they derisked known legal and reputational overhangs (Hunters Point) and took the developmentbusiness impairment tied to USAID, which cleans up the P&L and investor narrative. Convertible notes (2.25% due 2028) are struck around $39.3 (postsplit), with a capped call at ~$51.9, making dilution manageable until a higher price zone that, if reached, should coincide with a higher earnings base. I like this alignment.

The endmarkets are where durability comes from. On federal, TTEK sits on large IndefiniteDelivery/IndefiniteQuantity (IDIQ) vehicles for USACE and NAVFAC across the Pacific, Europe, and the U.S., plus EPA/Interior emergency response and environmental programs. Since spring they've announced new multiaward capacities of $990 Mn (NAVFAC Pacific), $249 Mn (USACE Huntsville), $248 Mn (USACE Europe) and $190 Mn (USACE Honolulu), among others; bookandburn ordering reduces backlog "optics" but accelerates revenue conversion, which the Q3 trend shows. On state & local, secular water investment continues, supported by targeted funding in California (Prop 4, $10 Bn), Texas Water Fund (~$1 Bn), and Florida Everglades/water quality (~$1 Bn) among others. On international, the UK's AMP8 (20252030) is the largest watersector spending cycle in decades, and TTEK is embedded with major utilities; Australia has been a soft spot, but management has been forthright about that and is working through it.

Unit economics are attractive for a peopleandIP business. Gross margin is utilization and mixdriven; highervalue consulting, program management and digital automation carry better margins than costplus development aid. Removing USAID shrinks the lowmargin layer; adding digital (automation, controls, analytics) to water and industrial work raises blended margins and stickiness. The cash cycle is healthy (DSO mid50s in Q3, a sequential 11day improvement), and the asset intensity is low (capex minimal vs. net revenue), which is why TTM operating cash flow is tracking at ~$462 Mn even through a policy shock.

PFAS is a multiyear tailwind. EPA finalized enforceable maximum contaminant levels for key PFAS compounds in April 2024; that unlocks municipal and DoD remediation design and compliance programs. This is squarely in TTEK's strike zone and tends to be scienceheavy, recurring work where category leaders win repeatedly.

I restate the P&L to separate "policy noise" from core earnings power. FY24 revenue was $5.199 Bn; in FY25 YTD, exUSAID/DoS, net revenue is +10% and adjusted operating income +24% y/y. Q3 FY25 adjusted EPS was $0.43 (ex the legal and impairment items), and FY25 adjusted EPS guidance now sits at $1.491.54. Working capital released cash as USAID programs were terminated, lifting OCF; I haircut this in my forward view to avoid overcrediting a onetime tailwind. Even with that haircut, I still get to FCF H EPS in FY26 and >EPS thereafter, which supports buybacks alongside tuckin M&A at a steady pace. Net leverage is sub1x; maturities are welltermed (convertible due 2028; revolver/term through 2030).

For the legal cleanup, the Hunters Point settlement/charge was recorded in Q1 FY25 ($97 Mn FCA + $18 Mn CERCLA; $115 Mn booked), with insurance clawback potential in process and remaining private claims expected to be manageable. I treat the payment as nonrecurring and do not assume any insurance recovery in my base case.

A quick history table (GAAP, $Bn unless noted) to anchor normalization:

Relative. On consensus, FY25 adjusted EPS is ~$1.5; FY26 ~$1.66; FY27 ~$1.681.74 depending on source. At $33.8, that's ~22x FY25 and ~20x FY26undemanding for a #1 water consultancy with sub1x leverage, doubledigit exUSAID growth, and rising margins. Peer comparables (AECOM, Jacobs, WSP, Stantec) generally trade in highteens to low20s P/E depending on mix; TTEK historically carried a quality premium. Post the policy shock, I think a return toward ~25x is reasonable as the dust settles and EPS grows.

Absolute. Using TTM OCF of ~$462 Mn as a starting point, subtracting normalized capex (~$2030 Mn, assetlight) and adding modest working capital needs as USAID winddown fully laps, I get steadystate FCF in the high$300s Mn on my FY26/27 model (call it ~$1.40/share FCF), rising with margins and booktoburn. Against an ~$8.9 Bn equity value, the implied FCF yield is ~4% on a normalized basisreasonable for a business with low capital intensity, high revenue visibility and multiyear secular tailwinds.

ReverseDCF crosscheck. At $3334 and a 910% cost of equity, the market is implicitly discounting midsingledigit EPS growth for years, or a sustained multiple in the highteens if growth is higher. My base case assumes lowteens EPS growth through FY27 driven by mix and a few points of organic net revenue growth acceleration. That gap explains the upside.

Scenarios. In the bear case (25% probability), broader civilian agency delays persist and Australia doesn't recover until late FY27; EPS tracks ~$1.51.6, and the multiple compresses to ~18x, leaving the stock in the low$30s with buybacks cushioning the downside. In my base (55%), exUSAID federal + state & local grow HSD, UK AMP8 ramps as planned, digital attach lifts margins +80 bps vs. FY24, and FY27 EPS lands ~$1.92.0; at 25x, the stock is ~$48$50. In the bull (20%), taskorder conversion and PFAS work pull forward, Australia stabilizes faster, and any partial USAIDlike development work reappears via other agencies; EPS >$2, and a ~2728x multiple on a "cleaner" story gets you $5560. I am not underwriting any USAID bounce in the base case.

The next two quarters are the proving ground. Q4 FY25 needs to show continued strength exUSAID/DoS with margin expansion and OCF discipline; I expect that bar is manageable given momentum in U.S. Federal (nonUSAID), state & local water, and digital. New task orders on the substantial USACE/NAVFAC capacities should surface in news flow and backlog commentary. UK AMP8 is now moving from regulatory determination to delivery; TTEK holds meaningful seats with utilities like United Utilities and Severn Trent, so design awards should scale into 2026. Finally, PFAS MCL compliance timetables will start converting into funded designs and construction management. Any upside from backfilled development work through State or defenselinked channels would be a positive surprise the market currently prices near zero.

The obvious risk is deeper/longer federal disruption beyond USAID. Agencies can slow award timing even if appropriations are in place; that crimps backlog optics and revenue conversion. My killswitch would be two consecutive quarters of declining backlog exUSAID/DoS accompanied by a cut to FY26 growth commentary; that would force me to revisit the forward EPS path and multiple. Australia's downturn lasting longer would pressure CIG; if International net revenue exAustralia doesn't offset, segment margins could stall. A macro recession could dent commercial and slow state & local throughput despite ringfenced funding. Legally, I assume no insurance recovery on Hunters Point and treat residual private actions as manageableany large, unexpected hit would change my FCF path.

Hedging is straightforward. If one wants to neutralize macro cyclicality and policy beta, a pairs setup long TTEK against a broader engineering basket (e.g., an AECOM/Jacobs blend) can isolate water/digital mix and execution alpha; alternatively, overlaying puts around earnings dates protects against timing surprises in federal awards while maintaining upside to a rerate. I'd also watch the convert strike ($~39.3) and capped call (~$51.9) as "natural" technical zones if shares accelerate.

I'm LONG. The evidence says the worst fears are already in the numbers while the core business is growing with better mix, margins are expanding, cash conversion is excellent, leverage is ~1x, and the company is buying back stock. My entry range is $3036; at ~$34 today, I model ~4050% 12month upside to ~$4852 on ~25x FY27 EPS of ~$1.92.0, with downside into the low$30s supported by balancesheet strength and buybacks.

I will monitor: backlog exUSAID/DoS, segment OI margins, state & local water order throughput, and tangible taskorder conversion on the large USACE/NAVFAC/EPA capacities. What would change my mind is evidence that nonUSAID federal is shrinking or that backlog exUSAID/DoS erodes for multiple quarters, implying the feared demand hole is real rather than just timing. Until then, I think the narrative is behind the dataand that's the opportunity.