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Want to Invest in Engineering R&D Services Stock? Buy AECOM (ACM)

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The Zacks Engineering – R&D Services industry has been witnessing robust demand for its services, thanks to a consistent focus on enhancing the infrastructure of the country’s defense, healthcare, communication, and renewable energy. The U.S. administration’s major focus on infrastructural enhancement has been creating the need for advanced construction and engineering solutions.

Although supply-chain constraints, input cost headwinds and labor constraints are ailing the industry, the companies’ shift toward digital transformation, mergers & acquisitions as well as operational efficiencies should lend support. Increasing investments in the decarbonization of energy efficiency and energy transition projects also appear to be growth drivers.

Among major industry bellwethers, AECOM (ACM - Free Report) appears to be highly attractive to investors. Shares of this supporting professional, technical and management solutions provider have climbed 15.7% in the past six months, faring better than the industry’s 2% growth. The stock has also outperformed the broader construction sector.

AECOM has been banking on strength across core transportation, water, and environment markets and a solid backlog. Furthermore, its focus on Environmental, Social and Governance or ESG-related services and digital initiatives are encouraging.

The company has an impressive earnings surprise history, having surpassed the Zacks Consensus Estimate in seven of the trailing eight quarters. The trend is expected to continue in the near term, courtesy of its solid prospects. Earnings estimates for fiscal 2022 have moved up 1.5% over the past 30 days to $3.40 per share, which indicates 20.6% year-over-year growth.

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Also, the company currently has a VGM Score of A, supported by a Growth Score of A and a Value Score of B. These positive trends signify analysts’ bullish sentiments and justify ACM’s Zacks Rank #2 (Buy), indicating robust fundamentals and the expectation of outperformance in the near term.

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

Factors Supporting Growth

Strength Across Segments: AECOM is expected to have gained from strength across core transportation, water and environment markets in fiscal 2022. The company’s net service revenues or NSR — defined as revenues excluding subcontractor and other direct costs — have been benefiting from the same, especially in the design business.

Its backlog amounted to $38.8 billion at fiscal first quarter 2022-end. The backlog level included 15% contracted backlog growth, with improvement in both Design and Construction Management businesses. Overall, the company’s performance demonstrates that it has been outgrowing the industry organically and capturing market share.

The company is also prioritizing its investments in ESG or Environmental, Social and Governance. Demand for ACM’s technical, advisory and program management capabilities is increasing against the backdrop of an improving funding environment, highlighted by the recent passing of the federal infrastructure bill in the United States as well as rising demand for ESG-related services. This underpins the company’s expectation of accelerating revenue growth in fiscal 2022 and continued margin, adjusted EBITDA, and adjusted EPS growth.

Strategic Moves: AECOM has been executing a plan that would transform the company into a pure-play professional services firm to improve profitability and de-risk the business profile. 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. After divesting the Management services and Power construction businesses, the company intends to exit at-risk construction and non-core oil and gas markets.

Management remains focused on leveraging scale and technical leadership by simplifying the operating model to drive greater collaboration across the business as well as push digital innovation. Further, improved profitability is enabling accelerated investments in organic growth and expanded digital capabilities through Digital AECOM — the company’s digital brand that includes a portfolio of products to more holistically serve clients on their digital transformations, which will be a key contributor toward achieving 17% longer-term margin target.

International Infrastructural Prospects Look Good: Prospects of AECOM look promising beyond the borders. Owing to an improvement in the global economic scenario, the company is expecting better infrastructural prospects in the international market. AECOM has been benefiting from solid infrastructural spending in the United Kingdom, Canada, Hong Kong and Australia. Overall, the international segment’s backlog grew 6% for first-quarter fiscal 2022, reflecting market share gains and growth visibility. Management remains confident of attaining its goal of achieving double-digit International margins by 2024.

Other Top-Ranked Stocks From the Broader Construction Sector

Fluor Corporation (FLR - Free Report) : Fluor — a Zacks Rank #1 company — is gaining from the "Building a Better Future" initiative, which is focused on enhancing markets outside the traditional oil and gas sector, fair and balanced commercial deals, financial discipline, and high-performing business culture. It made significant progress toward strategic goals that comprise the reduction of outstanding debt by 30% and identified ways for more than $150 million in annual cost savings.

Over the past 30 days, the Zacks Consensus Estimate for Fluor’s 2022 earnings has increased from $1.12 to $1.34 per share, indicating 42.6% year-over-year growth.

Sterling Construction Company, Inc. (STRL - Free Report) : Sterling — a Zacks Rank #2 company — has been benefiting from broad-based growth across the E-Infrastructure, Building and Transportation solutions segments.

The consensus mark for Sterling’s earnings for 2022 has increased to $2.86 from $2.63 per share over the past 30 days. The revised projection suggests 33% year-over-year growth.

D.R. Horton, Inc. (DHI - Free Report) : This leading homebuilder currently sports a Zacks Rank #1. This Texas-based prime homebuilder continues to gain from industry-leading market share, a solid acquisition strategy, a well-stocked supply of land, lots, and homes along with affordable product offerings across multiple brands.

D.R. Horton’s earnings are expected to rise 38.5% year over year in fiscal 2022.


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