TETRA TECH INC (TTEK) stock intrinsic value fair value estimate & owner earnings analysis

Tetra Tech is a consulting and engineering firm focused on water, environmental work, and resilient infrastructure. It earns fees, mostly on cost-plus and time-and-materials contracts, from the U.S. federal government, U.S. states and cities, commercial clients, and governments and utilities in the United Kingdom, Australia and Canada. It owns few physical assets: capital spending runs at about 0.4% of revenue, so almost all of its profit turns into cash. The main risks are not plant or machinery. They are client budgets, contract terminations and legal claims. Earnings level. We measure owner earnings as the cash from operations after removing working-capital swings, the cost of stock paid to employees, and the capital spending needed to keep the business running. On that basis, per-share owner earnings grew from $0.47 in fiscal 2016 to $1.43 in fiscal 2024 and $1.38 in fiscal 2025. These figures are adjusted for the September 2024 five-for-one split. Because we value the business before its lenders, we add back cash interest. That gives $1.57 and $1.51 per share for the last two years. We anchor on the median of those two years, about $1.54 per share or roughly $400 million. We start in fiscal 2024 because the January 2023 purchase of RPS Group, which cost about $854 million, made this a different and much larger business. Fiscal 2023 is left out because it carried the deal's integration and financing costs. This also corrects a mistake in our previous analysis, which used a cash figure that included temporary working-capital releases. The previous figures are not comparable with these. Two events in fiscal 2025 shape the analysis. First, the U.S. government cancelled virtually all USAID programs in February 2025. USAID had provided $677 million of revenue in fiscal 2024 and $576 million in fiscal 2025, and the company expects almost none in fiscal 2026. The resulting $92 million goodwill write-off is added back because it is non-cash. The lost earning power, however, is real, and it is why our base case starts flat rather than from the fiscal 2025 cash flow. Second, the company paid $97 million to settle the Navy's False Claims Act and CERCLA claims over its Hunters Point Shipyard remediation work. That payment reduced fiscal 2025 cash. Private-plaintiff claims over the same work remain unresolved. In fiscal 2025, owner earnings fell 3.4%. Without the one-time settlement, they would have risen. In the first nine months of fiscal 2026, with USAID essentially gone, operating cash flow was $467 million versus $357 million a year earlier. We treat that as confirmation that the anchor holds. We do not use it to raise the anchor. Base case: about $30.50 per share. Year one equals the anchor, about $400 million. That is 0% growth against a trailing 3.4% decline, and the gap is explained by the $97 million settlement, which was a dated, non-recurring payment. From there, cash flow grows 4% a year for four years and 3% for the next five. We credit only growth the company has shown it can repeat. It has bought small specialist firms every year for over a decade, typically $50 to $100 million a year out of its own cash. It has also grown state and local water work steadily: 13% in fiscal 2025 excluding disaster response. To pay for that buying, we deduct 20% of each year's cash. We give no credit for USAID returning, for repeats of large disaster-response years such as the 2024 hurricanes and the 2025 Los Angeles fires, or for management's growth targets. About $37 million a year of the amortization added back relates to acquired customer relationships, mainly from RPS. Those relationships wear out, which is one reason the growth path is set well below the 15% a year owner earnings compounded over the past decade. After year ten, we assume 1.5% growth with 15% reinvestment. That rests on demand for drinking-water, wastewater and environmental compliance work, which is required by regulation and has supported this business for decades. The business is worth about $8.6 billion, or $32.93 a share. It owes about $623 million after cash and after a credit for the cheap 2.25% convertible notes due August 2028, or $2.40 a share. That leaves $30.54. Bear case: about $20.80 per share. Cash flow falls 15% in year one and 30% in years two and three, to about $280 million. This draws on two disruptions the company has actually been through. One is the 2015-2016 energy and mining downturn, when its commercial and Australian work collapsed, a $61 million write-down followed and net income fell to $39 million. The other is the 2025 USAID loss, when one federal client worth about a tenth of revenue disappeared within a quarter. The case also includes another $60 million legal settlement, sized on Hunters Point, and assumes that the U.S. federal work, about 32% of revenue and terminable at the government's convenience, shrinks further. Cash flow recovers to 90% of today's level by year five, then grows 1.5% a year. After year ten there is no growth and no acquisitions. In this case the business is worth about $6.1 billion, or $23.38 a share. It owes the full $673 million of debt, net of surplus cash, with no credit for the cheap convertible because the notes would have to be refinanced in 2028 at market rates. That is $2.59 a share and leaves $20.79. Debt stays below 2.5 times bear-case cash flow, inside the 3.5 times leverage covenant in the May 2030 bank facility. Bull case: about $49 per share. Year one cash flow is $470 million. That matches the pace of the first nine months of fiscal 2026 and reflects $192 million spent on acquisitions this year. Cash flow then grows 6% for four years and 5% for five, still well below the decade's record. It is driven by the existing UK water-planning work under the regulators' 2025-2030 investment period, by U.S. state and local water spending, and by continued tuck-in acquisitions. After year ten, we assume 2.5% growth with 20% reinvestment. In this case the business is worth about $13.4 billion, or $51.60 a share. After $2.40 of debt, that leaves $49.20. Margin-of-safety price. We are fairly confident in the earnings level. It rests on two years that already reflect RPS. The weakest component, USAID, has now gone completely, and nine months of fiscal 2026 cash flow have held up without it. The worst plausible outcome is not an industry downturn. It is a federal decision, like the one in 2025, that removes a large share of revenue in a single quarter, combined with a large legal or environmental claim like the Hunters Point matter. The business could survive that. Debt is modest, capital needs are tiny, revenue is spread across thousands of contracts and four countries, and the bear case still leaves about $21 a share. What we are most likely to be wrong about is how much more U.S. federal work could be cut, whether the tuck-in program keeps adding value, and how quickly the RPS customer base erodes. Getting all three wrong at once points to the high teens. The price assumes a holding period of about three years for the price to reflect a base-case value near $30.50. Meanwhile the company pays a dividend of roughly $0.27 a share a year and buys back stock steadily. Reaching about $30 in three years from $17.50, plus those dividends, implies roughly a 20% annual return. And $17.50 is also below the bear-case value of about $21. That is why the margin-of-safety price is $17.50.