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Favorable Infrastructure Spend Aids AECOM (ACM) Amid High Cost

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AECOM ACM has been benefiting from the U.S. government’s broad infrastructural plans, strong construction management business and cross-border prospects. Also, its prudent efforts to transform itself into a higher-margin and lower-risk Professional Services business are commendable.

Yet, high costs & expenses are concerns for Jacobs as well as other industry players like Quanta Services, Inc. PWR, Jacobs Engineering Group Inc. J, and KBR, Inc. KBR.

Let’s see how the company’s fundamentals will help it overcome these barriers.

Impressive Backlog to Overshadow Inflation-Related Woes: AECOM has been witnessing robust prospects across the segments. Its net service revenues or NSR — defined as revenues excluding subcontractor and other direct costs — have been benefiting from strength across core transportation, water, and environment markets. For the fiscal third quarter, backlog totaled $39.7 billion. The Construction Management business backlog improved sequentially and backlog in the design business grew 8% from a year ago.

This apart, AECOM has been benefiting from the industry-leading position in green building and green design, environmental compliance and remediation, energy efficiency and infrastructure resilience. As a result of its ESG priorities, the company will be in a position to advise clients in key transportation, water and environment markets, thereby boosting the backlog level as well.

Yet, the industry is grappling with higher inflationary pressure regarding labor and transportation. Also, IT-related investment expenses and other investments may put pressure on margins. Nonetheless, AECOM’s good visibility of a strong backlog for the upcoming quarters overshadows these risks.

Infrastructure Spends Solid Amid Global Political & Economic Conditions: AECOM has been benefiting from solid infrastructure spending in the United Kingdom, Canada, Hong Kong and Australia. Overall, the international segment’s backlog grew 16% for the second quarter and in single digits for third-quarter fiscal 2021, reflecting market share gains and visibility into growth.

The company’s positive momentum should continue in the near term, given President Biden’s policies and industry trends. AECOM is expected to benefit from strong global trends in infrastructure modernization, energy transition, national security and a potential super-cycle in global supply chain investments.

Meanwhile, the company’s business is affected by uncertain global political and economic conditions. Also, it is facing certain challenges in a few of its end markets that might weigh on its near-term financial performance.

Nonetheless, the above-mentioned tailwinds will certainly help the company overcome these woes. Encouragingly, it can be said that the global consensus toward the need for substantial infrastructure investments will boost the company’s growth drive.

Restructuring Initiatives Reduce Cyclical Risk: AECOM has been executing a restructuring plan that would transform the company into a pure-play professional services firm. To that end, it is in the process of exiting more than 30 countries globally in order to prioritize investments in markets with higher prospects and competitive advantages. In 2020, AECOM completed the sale of the management services business and the Power construction unit.

Management remains focused on leveraging the company's scale and technical leadership by simplifying the operating model to drive greater collaboration across the business as well as digital innovation.

These tailwinds will reduce the risk of cyclicality. Historically, volatility in commodity prices has negatively impacted oil & gas business as well as business regions whose economies are substantially dependent on commodity prices, such as the Middle East, and affected North American oil and gas clients' investment decisions. The company intends to exit at-risk construction, and non-core oil and gas markets.

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