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AECOM (ACM) Stock Up 11% in 3 Months: More Room to Run?

Zacks Equity Research

AECOM ACM is gaining from record backlog level, favorable federal spending, strong book-to-burn ratio and robust transit and water markets. The company’s strategies to improve profitability and intent to de-risk business profile to focus more on the fastest growing markets are encouraging. However, demand for AECOM’s services is highly dependent on the general economic conditions which raises concern.

Meanwhile, the stock has gained 11.4% over the past three months, underperforming the industry’s rally of 22.5%. Let’s delve deeper.


Hidden Catalysts

AECOM enjoys robust prospects across all three segments. The segments recorded growth through fiscal 2018 on strength in construction and steady improvement in Americas’ design business.

The company also started fiscal 2019 on a positive note, resulting in a record backlog of $59.5 billion in the first quarter. Also, new order wins of $11 billion (up 80% from the prior-year period) set a new record, marking AECOM’s fifth consecutive quarter to surpass the $6-billion mark.

The company’s solid backlog level, a key indicator of revenue growth, indicates significant opportunities. Its book-to-burn ratio was 2.0 in the quarter, thanks to higher contribution from all segments and a significant book-to-burn ratio of 1.3 at the MS segment.

Moreover, favorable infrastructure spending in the United States, United Kingdom and Australia are driving growth for the company. Majority of the U.S. government’s $1.5-trillion infrastructural plan is focused on the transit and water markets where AECOM enjoys a dominant share. Furthermore, the U.K. government’s National Infrastructure and Construction Pipeline, which includes more than $600 billion of planned transformative investments, holds great promise.

In addition, the company’s transportation business in Australia is witnessing a steady rebound. The company believes that the business will gather more steam from the Australian government's $50 billion critical infrastructure investment commitment through 2020.

Moreover, in order to improve profitability and de-risk its business profile, AECOM has initiated a $225 million General and Administrative (G&A) reduction plan. This action is anticipated to benefit its DCS segment, with fiscal 2019 adjusted operating margin expectation of more than 7%, reflecting 110 basis points (bps) year-over-year growth.

Concerns

Demand for AECOM’s services is cyclical and hence largely vulnerable to reduction in government and private industrial spending. Also, dependence on political and economic conditions is a concern. Moreover, considerable international exposure makes the company highly vulnerable to fluctuations in currency exchange rates.

Also, the company’s widespread geographical presence makes it vulnerable to trade policies, tariffs and taxes. Changes in government regulations also have significant bearing on AECOM’s overall performance.

Zacks Rank & Stocks to Consider

AECOM currently carries a Zacks Rank #3 (Hold).

A few better-ranked construction companies include Great Lakes Dredge & Dock Corp. GLDD, Quanta Services, Inc. PWR and Apergy Corp. APY, each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes Dredge & Dock and Quanta Services’ 2019 earnings are projected to increase 170.6% and 25.3%, respectively. Apergy’s expected long-term earnings growth rate is 22.5%.

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