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AECOM Shares up 66% in a Year: What's Driving the Stock?

Zacks Equity Research

AECOM’s ACM shares have rallied nearly 66% in the past year, more than double of the Zacks Engineering - R and D Services industry’s growth of approximately 29%. The outperformance was backed by strong backlog position, encouraging infrastructure spending and cost-reduction efforts. Also, solid prospects across the business and strong brand presence are likely to drive growth.

The company’s solid earnings surprise history might have also supported the strong price movement. The company’s earnings surpassed the Zacks Consensus Estimate in eight of the trailing nine quarters.

However, uncertain global political and economic conditions, headwinds related to currency translation, and dependency on government projects may pressure the Zacks Rank #3 (Hold) company’s bottom line.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Let’s delve deeper.

Strong Performance & Upbeat View

AECOM’s business segments have solid prospects on strong backlog level. The company’s backlog at the end of third-quarter fiscal 2019 was up 11% from the prior-year quarter. Also, new order wins, a key indicator of revenue growth, were $27.5 billion in the period. The company’s solid backlog level and new order wins indicate significant opportunities.

Recently, AECOM revealed long-term financial targets and issued fiscal 2021 guidance for the proforma Professional Services business. The company plans to transform the proforma Professional Services business into a higher-returning and lower-risk firm. In the long run, the company expects witnessing adjusted operating margin of more than 15% for the Design and Consulting Services (DCS), and Construction Management businesses together. It also anticipates enterprise return on invested capital (ROIC) of more than 15%.

For 2021, the company expects year-over-year adjusted EBITDA growth of 14%. This upbeat view is supported by expected low to mid-single-digit organic and net service revenue growth, including 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 fulfillment of the expectations will likely result in industry-leading margins and a substantial increase in ROIC. Meanwhile, the company has reaffirmed its fiscal 2020 guidance.

Favorable Infrastructure Spending

AECOM’s diversified portfolio, which comprises designing and construction services, is spread across a number of key markets. More than 70% of its profits are generated from infrastructure and defense markets, which are poised to benefit from the favorable political climate in the United States and internationally.

Favorable infrastructure spending in the United States, Australia, New Zealand and Hong Kong is driving growth for the company. The majority of the U.S. government’s $1.5-trillion infrastructural plan is focused on 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 steady rise. It believes that the business will gather more steam from the Australia government's $50-billion critical infrastructure investment commitment through 2020.

The company’s DCS unit — contributing 41% to total revenues — is currently pursuing a multi-billion-dollar pipeline, which is expected to drive growth through fiscal 2020.

Strategic Initiatives

AECOM continues to invest in markets that are more aligned with its strategic and financial priorities. It executed a $225-million restructuring plan in fiscal 2019 and announced additional restructuring actions in August. Notably, on Oct 14, 2019, it planned to sell off its Management Services business, marking a milestone for its ongoing portfolio transformation. The transaction is expected to close in second-quarter fiscal 2020, subject to regulatory approvals and other customary closing conditions.

The company, which already completed nearly 50% of its country exit plan, intends to exit more than 30 countries to prioritize investments in markets with higher growth prospects and competitive advantages. Also, it entered a joint venture with Canyon Partners for ACAP, which will likely support AECOM’s overhead costs.

Solid VGM Score

AECOM has a solid VGM Score of A. Meanwhile, the company — which shares space with Gates Industrial Corporation plc GTES, Quanta Services, Inc PWR and Jacobs Engineering Group Inc J in the industry — is a great pick in terms of value investment, supported by a Value Score of A. Also, investors looking for a Growth pick may consider AECOM as it has a Growth Score of A.

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