AECOM (ACM Quick QuoteACM - Free Report) is benefiting from increasing trends in global infrastructure spending, portraying increased demand across the company’s strongest end markets, such as transit modernization, electrification, environmental remediation and climate resilience. This growth trend is reflected in the growing backlog levels of the company, thus solidifying its prospects. Also, its organic growth strategies and operational excellence are encouraging.

However, the high concentration of government projects and dependence on international market conditions are risk factors to the company’s growth prospects.

What Makes the Stock Attractive?

Growing Infrastructural Demand Trends: Given the economic scenario normalizing and inflation cooling down to some extent, the infrastructural demand around the globe is emanating signs of growing prospects. These trends are proving to be beneficial for AECOM along with the various public spending initiatives carried out in and outside of the United States. Running into the third year in 2024, the $ 1.2 trillion Infrastructure Investment and Jobs Act in the United States has accelerated the infrastructure demand in the country, thus favoring ACM.

Furthermore, the improving global scenario has increased the company’s infrastructural prospects in the international market including the United Kingdom, Canada, Hong Kong, Australia, New Zealand and the Middle East. In Australia, AECOM secured two substantial water projects in the quarter, reflecting clients' focus on water capacity expansion and achieving net zero ambitions.

Also, the company’s U.K. business has been generating stronger revenues, benefiting from several tailwinds like growing investments in AECOM's leading rail and transportation market. Owing to these tailwinds, management remains confident of attaining its goal of double-digit international margins by 2024.

Increasing Backlog Bodes Well: Owing to the improving global scenario, which is fostering infrastructural demand around the globe, there has been an increase in demand for ACM’s services. This improving trend is reflected in the company’s backlog levels. The company, which shares space with Fluor Corporation (FLR Quick QuoteFLR - Free Report) , KBR, Inc. (KBR Quick QuoteKBR - Free Report) and Quanta Services, Inc. (PWR Quick QuotePWR - Free Report) , is benefiting from strong end-market trends and has good visibility of strong backlog and pipelines for the upcoming quarters.

As of the fiscal first quarter of 2024, the company’s total backlog profitability increased 9% year over year, highlighting its focus on its core business of design and profitability. Furthermore, ACM’s International segment’s backlog at the end of the same period increased 12.1% to $6.37 billion year over year, reflecting market share gains and growth visibility.

Strategic Initiatives: AECOM is intently focusing on ensuring the efficient delivery of services, increasing profitability and expanding its margins along with maintaining shareholder value. The company’s organic growth initiatives and capital allocation policy are driving it toward new heights of success.

In the fiscal first quarter of 2024, ACM witnessed year-over-year increase in segment-adjusted operating margin on a net service revenue basis, adjusted EBITDA and adjusted EPS by 100 basis points, 14% and 25%, respectively. The uptick in the mentioned metrics was driven by the benefits from high-returning organic growth initiatives, expanding profitability and a returns-focused capital allocation policy.

Factors Hurting Growth

Government Project Concentration: AECOM derives a considerable share of revenues from government projects. Therefore, the company stands more prone to be impacted by the changes in the government’s rules and regulations. Moreover, these projects are mostly long-term contracts and any budgetary changes in the tenure can affect AECOM’s business.

During fiscal 2023, approximately 43% of its total revenues were derived from contracts with government entities. Federal contracts based on a low price, which is technically an acceptable criterion that emphasizes price over qualitative factors, are increasing. This implies that the company may face significant pricing pressure, which will ultimately reduce profit margins from future federal contracts.

Risks of International Market Dependence: AECOM’s business is subject to international political and economic conditions, given the concentration of business markets outside of the United States. Factors like changes in the United States’ and other national governments’ trade policies, regulatory practices, tariffs and taxes, further devaluations and other conversion restrictions and logistical & communication challenges might adversely impact the company’s financials. In fiscal 2023, 29% of total revenues were attributable to the services provided to non-U.S. clients.

A Brief Review of the Other Players

Fluor: The company is benefiting from robust end markets, strong client relationships and a resilient capital structure. This growing trend is reflected in the robust growth of backlog value, which is, in turn, is solidifying the growth prospects of the company. Also, encouraging market diversity aids the company mitigate the cyclicality of the markets in which it operates. In 2023, although new awards inched down 1.4% to $19.53 billion, the total backlog grew 13.2% to $29.44 billion year over year.

KBR: The company is benefiting from new and on-contract growth across Defense & Intel, Science & Space, and International within the Government Solutions unit and growing demand for the Sustainable Technology Solutions business. As of Dec 29, 2023, KBR’s backlog and option level was $21.73 billion compared with $19.76 billion in 2022 end. Also, its determination to reduce emissions, product diversification, inorganic moves and strategic alliances are encouraging. Owing to the improving trend, it expects 2024 total revenues in the range of $7.4-$7.7 billion, compared with $6.96 billion reported in 2023.

Quanta: The company’s growth trend is attributable to increased demand for its infrastructure solutions, which are crucial for supporting energy transition initiatives and enhancing reliability, safety and efficiency. It stands well-positioned to benefit from infrastructure investment driven by energy transition, technological advancements and initiatives focused on grid resilience and security, as evidenced by its robust backlog of $30.1 billion as of Dec 31, 2023.