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Why Is Aecom (ACM) Down 10.5% Since Last Earnings Report?

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A month has gone by since the last earnings report for Aecom Technology (ACM - Free Report) . Shares have lost about 10.5% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Aecom due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

AECOM Q4 Earnings & Revenues Beat Estimates, Up Y/Y

AECOM reported fourth quarter of fiscal 2018 results, wherein earnings and revenues surpassed the Zacks Consensus Estimate. Adjusted earnings of 83 cents per share surpassed the consensus mark of 81 cents by 2.5%. Also, the reported figure increased 12% on a year-over-year basis.

Revenues of $5,306 million surpassed the consensus estimate of $5,264 million by 0.8%. The figure also increased 9% on a year-over-year basis. Growth across the segments drove the top line. Moreover, AECOM achieved 9% organic growth in the quarter, which marked the eight-consecutive quarter of positive organic growth owing to higher-margin Americas design and MS business.

Segment Details

Design & Consulting Services (DCS) revenues rose 8.8% year over year to $2,171.3 million. On a constant-currency basis, organic revenues increased 11%, backed by strong performance in the company’s transportation and water markets in the Americas. This impressive performance can be attributed to improved funding and a strong backlog position. Adjusted operating income of $133.1 million grew 14.4% year over year.

Construction Services (CS) revenues were up 7.5% to $2,118.3 million on a year-over-year basis. On a constant-currency basis, organic revenues rose 5%. The solid performance of this segment was driven by Building Construction businesses (which registered double-digit growth). Adjusted operating income in the segment was down 6.6% from a year ago to $45.6 million.

Management Services (MS) revenues registered a year-over-year increase of 14% to $1,016.2 million. Also, on an organic basis, revenues recorded growth of the same percentage, reflecting stellar performance across its portfolio of projects and about 120% backlog improvement from the beginning of fiscal 2017. Adjusted operating income declined 2.6% from a year ago to $59.8 million in the reported quarter.

In the AECOM Capital (ACAP), which develops real estate, public private partnership (P3) and infrastructure projects, operating income of $13.1 million grew from the prior-year figure of $7.2 million.

Operating Highlights

AECOM’s gross margin was in line with the prior-year figure of 3.5%. Adjusted operating income in the quarter under review amounted to $217.9 million, up 9% from the year-ago quarter. Adjusted EBITDA also increased 4% year over year to $233.4 million.

At the end of the fiscal fourth quarter, the company’s total backlog of $54.1 billion was up 14%, reflecting a favorable mix shift to higher-margin DCS and MS segments.

New order wins for the full year were recorded at $28.4 billion, up 23% from the prior-year quarter. The company’s total book-to-burn ratio was 1.3, with higher contribution from all the segments and a significant 2.5 book-to-burn ratio in the MS segment.

Liquidity & Cash Flow

As of Sep 30, 2018, AECOM’s cash and cash equivalents totaled $886.7 million compared with $802.4 million on Sep 30, 2017.

As of Sep 30, 2018, total debt (excluding unamortized debt issuance cost) came in at $3,673.5 million, declining 5.7% from the year-ago quarter. AECOM generated a record free cash flow of $511 million in the reported quarter.

Fiscal 2018 Highlights

Revenues came in at $20.2 billion, up 10.7% from fiscal 2017. However, adjusted earnings decreased to $2.68 per share from $2.94 in fiscal 2017.

The company’s gross margin declined 60 basis points (bps) to 3.2%. Adjusted EBITDA of $836.5 million declined from the prior-year figure of $880.7 million.
   
Fiscal 2019 Guidance

AECOM has initiated its fiscal 2019 guidance, with adjusted EBITDA in the range of $920-$960 million. Adjusted EPS is expected within $2.60-$2.90 per share.

In terms of spending, the company’s adjusted interest expenses (excluding amortization of deferred financing fees) is expected to be nearly $200 million and capital expenditure is projected at about $120 million for fiscal 2019. Free cash flow is likely to be in the $600-$800 million range. However, AECOM is expected to incur $80-$90 million of restructuring costs in fiscal 2019, majority of which is likely to be incurred in the first six months of fiscal 2019.

The company is confident about its General and Administrative (G&A) reduction program, which is expected to generate $140 million of annual cost savings every year till fiscal 2021.

Strategic Actions

In order to improve profitability and de-risk its business profile, AECOM has initiated a $225 million G&A reduction plan. The action is anticipated to benefit its DCS segment, with fiscal 2019 adjusted operating margin expectation of more than 7%, reflecting 110 bps growth year over year.

The company is likely to exit more than 30 countries, in order to prioritize investments in markets with higher growth prospects and competitive advantages. Also, it has entered into a joint venture with Canyon Partners for ACAP, which will support AECOM’s overhead costs.

Moreover, its adjusted EBITDA expectation reflects 12% mid-point growth from the prior-year figure, supported by strong payback on the above-mentioned initiatives.

Additionally, its $1 billion share repurchase program, of which $850 million is remaining, is expected to result in strong fiscal 2019 performance and shareholder value creation.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates flatlined during the past month. The consensus estimate has shifted -19.44% due to these changes.

VGM Scores

At this time, Aecom has a great Growth Score of A, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of A. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Aecom has a Zacks Rank #5 (Strong Sell). We expect a below average return from the stock in the next few months.




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