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AECOM to Buy Shimmick, Make Most of Infrastructure Spend

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To make the most of the favorable infrastructure spending trend in the U.S., engineering behemoth, AECOM (ACM - Free Report) , recently announced an agreement to buy general engineering contractor, Shimmick Construction. The deal, valued at about $175 million, is likely to expand AECOM’s foothold in the heavy civil construction market in the Western U.S.

The deal is subject to customary closing conditions and is expected to close in AECOM’s fiscal fourth quarter. The company believes the buyout will fortify its design, build, finance and operate capabilities and further prove conducive to adjusted EPS upon closing.

Fortifying Construction Market Foothold

The Shimmick acquisition places AECOM in a better position to service clients that procure services on an integrated basis. Currently, AECOM has about $40-billion pipeline of alternative delivery pursuits across the U.S., including $6 billion in California. 50% of AECOM’s large non-residential projects in the U.S. are executed through design-build delivery.

Shimmick holds a dominant position in the civil construction market and has worked on some of the most iconic projects, including Golden Gate Bridge in San Francisco, the Gerald Desmond Bridge Replacement in Long Beach and Miramar Clearwell Improvements project. It has about 1000 employees and an impressive backlog of approximately $1.35 billion. AECOM is inheriting  this as a part of the buyout.

Escalating Infrastructure Spend

The bipartisan support for infrastructure investment in the U.S. is encouraging mergers and acquisitions in the infrastructure sector. Most of the government’s investment plans center around transit and water markets, where AECOM enjoys a dominant share.

The company remains upbeat about the recently-approved ballot measures in California and Washington, which will see infrastructure investments as high as $180 billion.  Some of the important developmental works in the region include Measure M in Los Angeles, Measure RR in San Francisco and Sound Transit 3 in Seattle.

This apart, transportation-specific spending in California is expected to increase, thanks to the recently passed $52-billion Road Repair and Accountability Act. Overall, California’s infrastructure market is expected to grow in double digits annually over the next four years, unlocking a host of opportunities for AECOM. The company believes bolstering its construction capabilities is only a rational step to ensure an opportunity to tap on the positive industry trends.

Near-Term Headwinds

Despite the positives, shares of AECOM have lost 10.6% over the past six months, wider than the Zacks categorized Engineering/R&D Services industry’s average decline of 8.3%. Volatility in the oil and gas market, with declining prices and contracting spending levels, has been hurting the company’s projects and orders.

Moreover, cyclical demand of the Zacks Rank #3 (Hold) company’s services and currency fluctuations are likely to thwart growth, going forward. Please note that brokers are on the sidelines for the stock as its earnings estimates for fiscal 2017 have remained unchanged over the last 30 days. The Zacks Consensus Estimate has remained steady at $2.96 over the same time frame.

Stocks to Consider

Some better-ranked stocks in the broader sector include TopBuild Corp. (BLD - Free Report) , Thor Industries, Inc. (THO - Free Report) and NVR, Inc. (NVR - Free Report) . While TopBuild sports a Zacks Rank #1 (Strong Buy), Thor and NVR hold a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

TopBuild has a positive average earnings surprise of 6% for the last four quarters, having beaten estimates thrice.

With three beats over the trailing four quarters, Thor Industries has an average positive surprise of 11.6%.

NVR has an average positive surprise of 3.7%, having beaten estimates twice over the trailing four quarters.

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