This infrastructure company beat analysts’ EPS estimates by $0.03 last quarter, and just inked a $25 million deal to renovate a building at the Air Force Academy.
AECOM (ACM)
From Argus Weekly Staff Report
AECOM is switching to a professional services business model, and has reduced G&A expense by $225 million by pulling out of risky, noncore markets. We have a favorable view of this shift and expect ACM to increase its focus on infrastructure projects going forward. We also expect growing demand for road and water projects to provide the company’s Design & Consulting Service unit with a stable source of revenue, even in a slowing economy.
Based on its financial strength, we think that ACM is well positioned to endure the coronavirus crisis. On January 31, 2020, the company completed the $2.4 billion sale of its Management Services business and used part of the proceeds to reduce debt. At the end of fiscal 3Q20, AECOM had $2.1 billion in total debt, down from $3.4 billion at the end of 4Q19. It also has an unused $1.4 billion credit line.
With the sale of the Management Services business, the company reports results in three segments: Americas, International and ACM Capital.
ACM ended the quarter with a backlog of nearly $41.2 billion, up 13% from the prior year. This is a solid showing at a time when other industrials are reporting declining backlogs. We are maintaining our FY21 estimate of $2.80 and setting an estimate of $3.10 per share for FY22. Our long-term EPS growth rate forecast remains 10%, in line with management’s five-year target. We expect demand for AECOM’s expertise and services to benefit from several secular trends, including accelerating urbanization in developing countries, the steady increase in the share of global GDP represented by these countries, the need to replace aging infrastructure in developed economies, and rising energy consumption
During the fiscal 2Q conference call, management said that almost 90% of the company’s projects are deemed essential and are continuing despite the impact of the coronavirus. As ACM continues to execute its strategic initiatives, we expect the shares to move higher.
We think that ACM shares are undervalued at current prices above $50, toward the top of their 52-week range of $28-$52. To value the stock on a fundamental basis, we use peer and historical multiple comparisons. ACM shares are trading at 16.1-times our FY22 (when we see full recovery) EPS estimate versus a range of 11-21 for peers. On price/sales, they are trading at the midpoint of the five-year range. Our rating remains BUY but with a new target price of $57.
Jim Kelleher, CFA, Argus Weekly Staff Report, argusresearch.com, 212-425-7500, November 27, 2020