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AECOM (ACM) Rides on Strategic Initiatives Amid Low Demand

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AECOM’s (ACM - Free Report) strategies to improve profitability and de-risk the business profile are encouraging. Also, strong prospects across the business and a strong brand presence are adding to the bliss. Shares of AECOM have outperformed its industry in the year-to-date period. The stock has gained 33.9% compared with the industry’s rally of 12.9% in the same period.

However, demand for AECOM’s services is highly dependent on general economic conditions. This is the company’s biggest concern. Also, volatility in commodity prices and extreme dependency on government projects add to the woes.

Let’s delve deeper into factors that substantiate its Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.


Major Growth Drivers
AECOM’s business has been witnessing strong prospects across segments. The company, which shares space with KBR, Inc. (KBR - Free Report) , Jacobs Engineering Group Inc. and Altair Engineering Inc. (ALTR - Free Report) in the industry, reported strong backlog at the end of fiscal third-quarter 2019. The backlog was up 10% year over year. New order wins were $21.2 billion, with a total book-to-burn ratio of 1.3. Its solid backlog and contract wins, which are key indicators of future revenue growth, indicate significant opportunities in the forthcoming quarters.

Of the three reportable segments, AECOM’s Design and Consulting Services or DCS (which contributed 41.3% to total third-quarter fiscal 2019 revenues) and Management Services or MS (20.6%) segments are major growth drivers. In both the segments, the company is pursuing a multi-billion-dollar pipeline of opportunities. It expects the growth trend of both the segments to continue in fiscal 2019 as well. Particularly in the MS business, backlog increased nearly 127% since the start of fiscal 2017. AECOM expects the impressive level of backlog of large commercial, stadia and power projects to drive another year of revenue growth and margins.

It remains on track with the five-year financial plan through fiscal 2022 to deliver more than 5% revenue CAGR, at least 9% adjusted EBITDA CAGR, 12-15% adjusted EPS CAGR and not less than $3.5 billion of cumulative free cash flow.

AECOM remains on track with its $225-million General and Administrative (G&A) reduction plan in order to improve profitability and de-risk the business profile. This move is anticipated to benefit its DCS segment. Notably, the company lifted its fiscal 2022 adjusted operating margin target in the DCS segment to nearly 8%, indicating growth of 100 basis points (bps) from fiscal 2019 expectation and 210 bps from the fiscal 2018 level.

Markedly, favorable infrastructure spending in the United States, United Kingdom and Australia is helping AECOM’s business. The majority of the U.S. government’s $1.5-trillion infrastructural plan is focused on transit and water markets, wherein AECOM enjoys a dominant share.

Causes of Concerns

Demand for AECOM’s services is cyclical, and hence largely vulnerable to reduction in government and private industrial spending.

Notably, its Construction Services or CS segment, which added 38.1% to total revenues, declined 10% in the fiscal third quarter and 4.7% in first nine months of the fiscal year, owing to lower contribution from Building Construction and Power businesses.

Dependence on political and economic conditions is a major concern. Moreover, considerable international exposure makes the company highly vulnerable to fluctuations in currency exchange rates. Also, AECOM’s widespread geographical presence makes it vulnerable to trade policies, tariffs and taxes. Notably, changes in government regulations have a significant bearing on AECOM’s overall performance.

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