When I first wrote about Tetra Tech (TTEK) in January 2025 I urged cautious optimism. That caution has proved warranted. Upon taking office, the new administration issued a 90‑day freeze on nearly every USAID task order. As expected, this had a meaningful impact on Tetra as management pulled roughly $400 million of revenue and $0.05‑0.10 of fiscal year (FY) 2025 EPS from guidance. Investors responded in kind, driving the stock from the low $40s at the time, to around $30. Since then, the stock has remained in a range between $28-$32.
What follows is a walk-through of my updated assumptions on revenue, operating margins and cash flow; and how each one rolls into a $30 per‑share intrinsic valuation for the company. I close with the bull‑case levers that could push that figure higher.
Revenue Assumption, Justification and Risks
The $400 million USAID suspension removes a material revenue stream. It is important to note that the balance of Tetra Tech’s federal work appears intact.
Given this, for FY 2025, I assume net revenue $4.45 billion, roughly 3% above FY 2024. This assumption uses the low of management’s guidance from Q1 2025 earnings.
This level is meaningful for two reasons:
- It already excludes the entire $400 million USAID stream.
- It assumes growth, reflecting the disaster‑response surge that lifted Q1 results.
From that new base, I project +4% in FY 2026 and +5% in FY 2027‑29. These assumptions are driven solely by contracts that already carry funding authority including:
* Assumes 30-40 % utilisation of ceiling within 24 months, consistent with historic USACE patterns.
** Assumes 0.5% capture of Year‑1 task‑order volume, half the share achieved on the legacy OASIS contract.
Why The Growth Rates Are Plausible
Without going into the details of each contract, the takeaway is that the total incremental revenue from these contracts in 2026 is $120–165 million. This is equal to more than the 4% modeled for 2026.
Further, the backlog disclosed in January stands at $5.4 billion, dominated by water infrastructure and resiliency work. Growing revenue at 5% per year (2027‑29) sits below management’s 6–10% target (announced in May 2024).
These assumptions effectively assume no contribution from a potential USAID reinstatement. Therefore, it only reflects already‑awarded, funded work progressing at conservative utilization rates.
Revenue Assumption Risks
The revenue assumptions face two primary risks that could slow growth below the modeled 4–5%:
- Lower Federal Contract Utilization. Federal utilization could fall below modeled expectations (e.g., USACE at 20%, OASIS+ below 0.25%).
- Expanded USAID Freeze. The USAID freeze could expand to other foreign-aid contracts putting additional revenue at risk. Tetra’s exposure is somewhat limited in that only ~20% of revenue comes from international markets.
Operating Margin Assumption, Justification and Risks
The January quarter showed an 11.8% EBIT margin even while lower‑margin Ukraine work was still running. Since USAID projects (now paused) generally run 150–200 basis points below the corporate average, removing them tilts Tetra’s revenue mix toward higher margin projects. These are higher margin projects including fixed‑fee water‑infrastructure and PFAS‑remediation work, disaster‑recovery management, and digital water and analytics tools (“Delta” platform) which add revenue with minimal incremental headcount.
At management’s May 2024 Investor Day management set a formal objective of 50 basis points of EBIT margin expansion. Management credited this potential to its revenue mix shift and software leverage. Tetra’s management is also afforded flexibility due to the asset‑light nature of the business with CapEx well under 1% of sales and a workforce redeployable within weeks.
These thoughts are reflected in the model as follows:
- For FY 2025, EBIT margins are held at 11.8%, matching the Q1.
- In FY 2026, margins are stepped to 12.0 % (+50 bps), reflecting higher margin business as discussed.
- In FY 2027 and onward, margins are further lifted to 12.25% and finally 12.5% by FY‑28.
Each additional 50 bps above 11.8% contributes roughly $1.70 per share to intrinsic value. The path to 12.5% therefore explains nearly $3.40 of the $30 per share valuation. This sits at the low end of management’s stated ambition. We lean conservatively despite the potential for greater margins expansion beyond our input assumptions.
Operating Margin Assumption Risks
While margins do appear preserverable given the nature of Tetra’s business model, inflation, labor tightness, supply chain disruptions, or unexpected project complexity could cap margins at current level.
Other Assumptions
The model has CapEx staying where it has lived for two decades; around a third of one percent of sales. Working capital is flat. That combination means free cash flow tracks EBIT, compounding near seven percent based on the inputs discussed. Discount those flows at 8.5 percent, give the business a 2.5 percent perpetual growth rate, and the output enterprise value lands at $9 billion and equity value of $30.50 per share. This is almost exactly the mid‑point of the recent trading range and today’s current stock price.
Other Assumption Risks
The cash flow and valuation assumptions assume stable macro conditions. A U.S. recession or rising interest rates could increase the 8.5% discount rate to 9–10%, impacting fair value.
Where the Upside Hides
The model is intentionally conservative. We live in uncertain times. However, there are several plausible developments that would lift Tetra’s fair value beyond today’s price.
- USAID review (late April). In late April, the State Department will release the fate of the USAID task orders. If even half of the frozen task orders are reinstated, FY 2026 revenue will climb about $40 million.
- Faster OASIS+ uptake. My model assumes a 0.5% slice of first‑year task‑order volume. Each extra 0.25% share is worth $20-25 million in revenue.
- Margins reflect management’s expectations. As we have discussed, higher margins are achievable as fixed‑fee water and PFAS jobs replace lower margin cost‑plus aid work.
- New federal infrastructure push. Given the bipartisan appetite for infrastructure spending particularly for coastal protection and port upgrades, it is within the realm of possibilities that a Trump branded bill be introduced. This would accelerate U.S. Army Corps of Engineers (USACE) and state backlog conversion. This means that even a 1% conversion of the $5 billion backlog would contribute $50 million in revenue.
Any one of these levers lifts Tetra’s intrinsic value.
Why the Floor Feels Sturdy
It is worth reiterating a few of the points of optimism for Tetra which I addressed in my previous article. The point was centered on three structural anchors. The recent attempt to stall Infrastructure Investment and Jobs Act (IIJA) and Inflation Reduction Act (IRA) spending actually underscores them.
- Contract diversity. Only the USAID slice is on hold; the Department of Defense, EPA, U.S. Army Corps of Engineers (USACE), and state budgets continue uninterrupted. When the administration tried to pause IIJA and IRA infrastructure funds earlier this year, a federal court forced agencies to resume disbursements within weeks. This is a reminder that domestic water‑ and climate‑resilience dollars enjoy bipartisan, statutory backing. Tetra Tech’s funded backlog is largely tied to those mandates and never skipped a beat.
- Secular demand. Water scarcity, PFAS remediation and climate‑resilient infrastructure are not elective projects, driving long-term demand for these projects.
- Asset‑light flexibility. CapEx remains well below 1% of sales and technical staff can be redeployed quickly, allowing management to defend margins even if revenue growth hesitates.
Final Thoughts
Could the bearish scenario deepen? Certainly. If lower contract utilization, prolonged USAID cuts, and margin pressures coincide, as outlined in the risk sections, Tetra’s fair value could suffer. But even if 2–3 of my assumptions fall short, downside appears limited. The May 2025 Q2 earnings and USAID decision will be critical for clarifying revenue and margin trajectories, potentially shifting market sentiment.
Disclosure: I have no positions in Tetra Tech.
