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Here's Why Investor Should Hold on to AECOM (ACM) Stocks Now

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AECOM (ACM - Free Report) continues to benefit from solid backlog levels and concentration on higher-margin and lower-risk professional services businesses. It is also benefiting from solid infrastructure spending in Canada, Hong Kong and Australia. Consequently, shares of the company have gained 140.1% over the past year compared with its industry’s 110% rally.

Recently, AECOM reported first-quarter fiscal 2021 results, wherein both earnings and revenues beat the Zacks Consensus Estimate by 8.8% and 3.3%, respectively. Also, the top and bottom lines grew 2.4% and 35%, respectively, on a year-over-year basis. Its highly variable cost structure, diversified customer base, and agile culture to perform across varied market trends bode well.

However, the cyclical nature of the business, continued volatility in the oil and gas market, and uncertain political and economic conditions are impacting the company.

Major Growth Drivers

Strong Backlog: AECOM is observing solid prospects in all its operational segments. The company’s net service revenues (NSR) have been benefiting from strength across core transportation, water and environment markets. Also, growth in Construction Management adds to the bliss. Its backlog of $39.7 billion at the fiscal first-quarter end was up 8% from the prior-year period.

Notably, quarterly backlog in the design business grew 9% from a year ago. Backlog across the Professional Services business increased 13% to a record level. The company’s robust backlog levels, which are major indicators of future revenue growth, indicate substantial opportunities in the upcoming quarters.

Restructuring and Reorganizational Plans: AECOM has been executing plans to improve its profitability and reduce the risk of its business profiles. This would transform the company into a pure-play professional services firm. To implement the change, AECOM is in the process of exiting more than 30 countries globally, thereby, prioritizing its markets with higher prospects and competitive advantages.

In January 2020, the company completed the sale of the management services business. In October 2020, it wrapped up the Power construction business divestiture. The company intends to exit at-risk construction and non-core oil and gas markets. Also, management highlighted that its top 20 clients represent roughly 20% of NSR and the top nine geographies represent greater than 90% of profitability. AECOM will allocate more resources toward these clients/markets.

Advantageous Infrastructure Spending & Cross-Border Prospects: The company has favorable opportunities beyond the border. It has been benefiting from solid infrastructure spending in Canada, Hong Kong and Australia. Overall, the International segment’s backlog — including record contracted backlog — grew 10% for first-quarter fiscal 2021, reflecting market share gains and visibility into growth.

AECOM’s performance across the Asia Pacific region continues to be led by strong public-sector infrastructure investment in Australia and New Zealand. In Saudi Arabia, AECOM has invested resources to take advantage of a robust set of opportunities that include the $500-billion NEOM development. In third-quarter fiscal 2020, AECOM witnessed more than $100 million of win, which demonstrates its commercial success and diversifies its work on projects.

 

 

Concerns

Over the past few quarters, AECOM’s business has been experiencing certain challenges in a few of the end markets served, particularly China and the Middle East. The company’s revenues for fiscal 2020 declined 3% from the fiscal 2019 level.

AECOM’s business is affected by uncertain global political and economic conditions. Further, the demand for the company’s services is cyclical and hence, is largely vulnerable to a reduction in government and private industrial spending. The continued volatility in the oil and gas market is hurting the company’s projects and orders, especially in the Middle East. Lower capital spending on part of major clients is proving to be a major concern for the company. Market forces that regulate client spending are beyond the company’s control and this adds to the uncertainties.

Zacks Rank

AECOM — which shares space with Quanta Services, Inc. (PWR - Free Report) , Jacobs Engineering Group Inc. (J - Free Report) and KBR, Inc. (KBR - Free Report) in the Zacks Engineering - R and D Services industry — currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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