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AECOM (ACM) Announces Long-Term and 2021 Financial Targets

Zacks Equity Research

AECOM ACM recently unveiled long-term financial targets and issued its fiscal 2021 guidance for the proforma Professional Services business in a bid to transform the same into a higher-returning and lower-risk firm. In its Investor Day in New York City, AECOM highlighted that the company remains focused on achieving long-term financial targets via execution of strategies and continued innovation.

Long-Term Targets

The company expects adjusted operating margin to be more than 15% for the Design and Consulting Services (DCS) and Construction Management businesses combined. It anticipates enterprise return on invested capital (ROIC) to be more than 15%. Notably, both operating margin and ROIC are expected to exceed the industry averages. AECOM also expects to continue delivering industry-leading cash flow, including unlevered free cash flow conversion of at least 75% of adjusted EBITDA in the proforma Professional Services business — which includes DCS, Construction Management and AECOM Capital businesses, and excludes the Management Services business. It also excludes at-risk, self-perform businesses within the Construction Services segment, which AECOM intends to divest.

The company has initiated its 2021 guidance for the proforma Professional Services business. It expects adjusted EBITDA in the range of $825-$865 million, indicating 14% year-over-year growth at the mid-point. This upbeat view is supported by expected low-to-mid single digit organic and net service revenue growth including expected double-digit improvement in the Construction Management business, annualized benefits of restructuring actions undertaken in fiscal 2020, and ongoing efforts to further enhance profitability. The successful achievement of these expectations would result in industry-leading margins and a substantial increase in ROIC.

Meanwhile, the company has reaffirmed its fiscal 2020 guidance. Pro-forma Professional Services’ adjusted EBITDA is expected between $720 million and $760 million, indicating 12% year-over-year growth at the mid-point. It expects free cash flow (excluding cash uses for restructuring and timing impacts related to the Management Services business sale) within $600-$800 million.

Notably, on Oct 14, 2019, AECOM entered into an agreement for the sale of the Management Services business, marking an important milestone for its ongoing portfolio transformation. The sale to American Securities LLC and Lindsay Goldberg is expected to close in second-quarter fiscal 2020, subject to regulatory approvals and other customary closing conditions.

The company — which has already completed nearly 50% of its country exit plan as of Sep 30, 2019 — intends to exit more than 30 countries in order to prioritize investments in markets with higher prospects and competitive advantages. Post the completion of the latest divestiture, the professional services business is expected to be a lower risk, higher-returning firm focused on industry-leading design, planning, architecture, engineering, program management and construction management capabilities.

Courtesy of this ongoing transformative initiative, shares of this Zacks Rank #2 (Buy) company have surged 61.1% so far this year compared with the Zacks Engineering - R and D Services industry’s 21.5% rally. The price performance was also backed by a solid earnings surprise history. Its earnings surpassed the Zacks Consensus Estimate in eight of the trailing nine quarters.

Other Stocks to Consider

Other top-ranked stocks in the same space include Gates Industrial Corporation plc GTES, Quanta Services, Inc PWR and Orion Group Holdings, Inc. ORN, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Gates Industrial’s earnings surpassed estimates in two of the trailing four quarters, with the average positive surprise being 12.1%.

Quanta Services’ 2020 earnings are expected to rise 21.5%.

Orion Group’s earnings for 2020 are expected to increase 211.8%.

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