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Here's Why Investors Should Steer Clear of AECOM (ACM) Now

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AECOM (ACM - Free Report) has failed to gain investors’ confidence despite having a diversified portfolio, as well as undertaking various restructuring initiatives to improve profitability and de-risk business. The company’s shares have declined 18.2% in the past six months, underperforming its industry’s decline of 17.8%. Moreover, earnings estimates for 2018 earnings have declined 0.7% over the past 30 days, limiting upside potential for the stock’s earnings potential.

Let’s delve deeper and try to assess what’s taking this Zacks Rank #5 (Strong Sell) company down the hill.

Project Execution Challenges Across CS Segment: During the fourth quarter of fiscal 2018, AECOM witnessed execution challenges in its Construction Services or CS segment. A significant number of projects under the said segment resulted in unfavorable operating results. During the quarter, the company reported adjusted operating income of $45.6 million, down 6.6% from the year-ago quarter.

Lower Volume in AMEA Region: United Kingdom is one of the largest markets for AECOM’s Design and Consulting Services segment. Yet, the U.K. market experienced lower-than-expected volume growth during the fiscal fourth quarter. The softness was mainly due to uncertain medium to long-run impacts of Brexit ahead of the Mar 29, 2019 separation date of the United Kingdom from the European Union.

Margins Under Pressure: Gross margin, as a percentage of revenues, in the Construction Services segment and Management Services segment declined 80 basis points (bps) and 130 bps, respectively, during the fiscal fourth quarter. The decline primarily stemmed from losses incurred in the oil and gas business in North America and other construction projects.

Dismal Guidance: Due to the above-mentioned headwinds, the company provided tepid view for fiscal 2019. It expects adjusted EBITDA in the range of $920-$960 million, reflecting 12% mid-point growth from the prior-year level. On the fiscal fourth-quarter earnings call, the company had provided earnings guidance in the range of $2.69-$2.90 per share, which was lower than the market expectation.

Meanwhile, for the first quarter of fiscal 2019, the consensus estimate is pegged at 51 cents, which reflects a 10.5% year-over-year decline. Also, the consensus mark for fiscal 2019 reflects a year-over-year growth of only 1.5%.

Stocks to Consider

Some better-ranked stocks in the Construction sector include Great Lakes Dredge & Dock Corp. (GLDD - Free Report) , Comfort Systems USA, Inc. (FIX - Free Report) and EMCOR Group, Inc. (EME - Free Report) . While Great Lakes and Comfort Systems sport a Zacks Rank #1 (Strong Buy), EMCOR carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Great Lakes’ 2018 earnings are expected to increase 111%.

Comfort Systems has an expected earnings growth rate of 84.4% for the current quarter.

EMCOR has a projected earnings growth rate of 20% for the current year.

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