AECOM (ACM - Free Report) has been gaining investor confidence on continued positive results and construction tailwinds. Year to date, the stock has rallied 27.3% compared with the industry’s 23% rise. Also, the company has outperformed the S&P 500’s 14.4% rise in the said period. The price performance is backed by AECOM’s impressive earnings surprise history. Notably, the company surpassed earnings estimates in all the trailing seven quarters.
Recently, the company posted stellar second-quarter fiscal 2019 results, wherein earnings and revenues not only topped the Zacks Consensus Estimate by 13.1% and 3.2%, but also improved 3% and 5.2% year over year, respectively. AECOM achieved 7% organic growth, marking the 10th consecutive quarter of positive organic growth, owing to higher-margin Americas design and Management Services (“MS”) business. It also recorded 17% adjusted EBITDA growth and an all-time high backlog of $61 billion.
Meanwhile, earnings estimates for fiscal 2019 and 2020 have been upwardly revised over the past few weeks, suggesting that sentiments on AECOM are moving in the right direction. Notably, earnings estimates for fiscal 2019 and 2020 have increased 0.4% and 0.6%, respectively, over the past seven days.
Let’s delve deeper into the factors that bode well for this Zacks Rank #2 (Buy) company. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
What’s Working in Favor of the Stock?
Solid Prospects: AECOM ended the first half of fiscal 2019 on a strong note, as is evident from 16% adjusted EBITDA growth during the period. The company’s solid backlog levels, which are a key indicator of future revenue growth, indicate significant opportunities in the forthcoming quarters. It reported record backlog of $61 billion in the fiscal second quarter, up 22% from a year ago. New order wins during the quarter were recorded at $8.1 billion (up 17% from the prior-year period), marking the sixth consecutive quarter surpassing the $6-billion mark.
MS and Design and Consulting Services (“DCS”) segments continue to benefit from higher-margin work in the business. In the MS segment, backlog increased nearly 127% since the start of fiscal 2017. It exited the first half of fiscal 2019 with more than $3 billion of wins. In the MS line of business, AECOM continues to proceed with more than $30 billion pipeline of pursuits. The company expects its impressive level of backlog of large commercial, stadia and power projects to drive another year of revenue growth and margins. In the DCS segment, it is currently pursuing a multi-billion-dollar pipeline of opportunities and expects to continue the growth trend in fiscal 2019.
For fiscal 2019, AECOM expects to deliver strong revenue improvement, 12% adjusted EBITDA growth at the midpoint of the guided range and 600-$800 million of free cash flow. Overall, it constitutes a great pick in terms of growth investment, supported by a Growth Score of B.
Strong Restructuring Initiatives: In order to improve profitability and de-risk its business profile, AECOM has initiated a $225-million General and Administrative (G&A) reduction plan. This action is anticipated to benefit its DCS segment, as is evident from fiscal 2019 adjusted operating margin expectation of more than 7%, reflecting 110 basis points (bps) year-over-year growth of the segment. Moreover, it expects to achieve more than 7.5% adjusted operating margin in fiscal 2020. Such efforts are likely to benefit DCS’ profitability in particular.
The company, which has already completed 25% of its country exit plan as of Dec 31, 2018, intends to exit more than 30 countries in order to prioritize investments in markets with higher growth prospects and competitive advantages.
VGM Score: AECOM has a VGM Score of A. Our VGM Score identifies stocks that have the most attractive value, growth and momentum characteristics. In fact, our research shows that stocks with VGM Scores of A or B when combined with a Zacks Rank #1 or 2 make a solid investment choice.
Other Stocks to Consider
Other top-ranked stocks in the Zacks Construction sector include EMCOR Group, Inc. (EME - Free Report) , MasTec, Inc. (MTZ - Free Report) and Quanta Services, Inc. (PWR - Free Report) . While EMCOR and MasTec sport a Zacks Rank #1, Quanta Services carries a Zacks Rank #2.
EMCOR’s earnings per share are expected to increase 11% in 2019.
MasTec’s 2019 earnings per share are expected to increase 19.9%.
Quanta Services has an expected earnings growth rate of 28.8% for 2019.
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