AECOM: Good Growth Prospects Driven By Secular Demand Trends (NYSE:ACM)

Funding Thesis

AECOM (NYSE:ACM) is well-positioned to maintain its spectacular income and margin progress within the foreseeable future. The corporate’s income progress is anticipated to be boosted by a number of components. Firstly, it advantages from a sturdy backlog of tasks, totaling $41.9 billion as of the tip of Q2 FY23. Moreover, AECOM is experiencing an elevated fee of undertaking wins, and the composition of its backlog is bettering resulting from an increase in higher-value long-term tasks value $25 million or extra. Moreover, the corporate is poised to capitalize on multi-year demand tendencies pushed by ongoing international investments in infrastructure, sustainability, resilience, and long-term transitions within the provide chain and vitality sectors. Notable initiatives contributing to this demand embody the Infrastructure Funding and Job Act (IIJA), the Inflation Discount Act (IRA), and numerous different infrastructure funding packages worldwide.

The corporate’s margins are anticipated to learn from efficient undertaking execution and the next proportion of higher-margin tasks within the backlog. Moreover, AECOM anticipates attaining effectivity features, which ought to additional improve its margins. AECOM’s valuation can also be affordable and the corporate trades at a major low cost in comparison with its peer, Tetra Tech (TTEK). Contemplating the favorable prospects for income progress and margin enlargement, and an affordable valuation, AECOM’s inventory offers a sexy funding alternative.

Income Evaluation and Outlook

In my earlier article in February, I shared a optimistic outlook on AECOM’s income progress prospects, pushed by robust demand and elevated infrastructure funding initiatives such because the IIJA and IRA. Since then, the corporate has launched its earnings report for the second quarter of fiscal 2023, which reaffirmed these optimistic dynamics.

In the course of the second quarter of fiscal 2023, AECOM skilled an acceleration in authorities funding, which additional bolstered the demand ultimately market. The corporate’s income progress was additionally supported by efficient backlog execution and a excessive fee of undertaking wins within the design enterprise. Because of this, there was a 9% year-over-year improve in income, reaching $3.4 billion. Internet Service Income (NSR) additionally exhibited progress, rising by 7% year-over-year on a relentless forex foundation. The NSR progress primarily displays an 8% year-over-year improve within the design enterprise, which accounts for 90% of the whole NSR. Complete NSR, together with the influence of forex headwind, was up ~4% YoY.

Regardless of the corporate beating sell-side estimates within the quarter, if we take a look at the inventory’s efficiency it has seen a mid-single-digit lower since posting its all-time excessive in mid-February. The explanation behind this underperformance is probably going buyers’ fear in regards to the slowing business Actual property market the place AECOM has some publicity. I imagine this worry is unwarranted as accelerating Federal spending ought to greater than offset any slowdown in CRE markets. Within the final quarter, the corporate reported a stable book-to-bill ratio of 1.5x within the design enterprise which signifies a superb demand surroundings.

Wanting forward, AECOM is well-positioned to keep up its robust income progress resulting from a number of components, together with a sturdy backlog, favorable secular demand tendencies, and federal funding help.

An organization’s backlog is an efficient indicator of its future income progress, and AECOM has a wholesome stage of backlog that helps its future efficiency. Within the second quarter of fiscal 2023, the corporate’s backlog elevated by 3% year-over-year, reaching $41.9 billion, with progress noticed in each its Americas and Worldwide enterprise segments. Notably, the design enterprise, which accounts for about 90% of the whole internet service income, skilled a ten.5% year-over-year progress in its backlog, or 12% year-over-year on a relentless forex foundation, reaching roughly $20.9 billion. Furthermore, the corporate has been profitable in successful greater than half of each greenback it bids, with an excellent increased success fee of over 70% on massive international bids within the first half of the yr. This success has resulted in a metamorphosis within the composition of the backlog, with long-term tasks valued at $25 million or extra, now comprising 30% of the backlog, greater than double the extent from only a few years in the past. These strong backlog ranges and elevated win charges for big tasks present a stable basis for sustained income progress sooner or later.

Moreover, AECOM’s finish markets are poised for continued progress, supported by secular demand tendencies in international infrastructure funding, sustainability and resilience, and long-term transitions in provide chains and vitality.

Governments worldwide, notably in developed nations just like the U.S., have intensified their concentrate on addressing growing old and overloaded infrastructure. This has led to elevated infrastructure stimulus packages aimed toward modernizing and upgrading infrastructure programs to make sure security and effectivity. AECOM has already witnessed the acceleration of presidency funding movement, together with initiatives such because the IIJA, IRA, and the CHIPs and Science Act. These funding initiatives have expanded the pipeline of alternatives and supported backlog progress, and the corporate anticipates these investments to proceed growing for the following few years, offering a good medium-term outlook for demand.

The demand for infrastructure tasks has additionally been pushed by the pressing want to handle the opposed results of local weather change. There’s a rising emphasis on local weather resiliency and sustainability tasks globally, aimed toward mitigating the influence of local weather change and guaranteeing the long-term viability of infrastructure. Furthermore, there’s an growing emphasis on vitality transition and sustainability, with rising demand for renewable sources of energy technology and environmental safety measures. The reshoring of producing in the USA, pushed by provide chain challenges post-COVID, has additional elevated demand throughout numerous finish markets.

These demand tendencies have translated into vital undertaking wins for AECOM in latest quarters. As an illustration, the corporate secured contracts for PFAS remedial investigation and feasibility research for the U.S. Military Nationwide Guard, and administration expects extra alternatives arising from IIJA funding for rising contaminants like PFAS. The administration lately shared their estimates on PFAS market dimension in an investor presentation the place they characterised it as a multi-billion greenback alternative. AECOM was additionally chosen to supply technical and program administration providers for a big wastewater remedy program in California, reflecting the rising demand for local weather resiliency and sustainable options. Moreover, the corporate was chosen by the US Division of Power’s Workplace of Clear Power and Demonstrations to leverage its experience in securing aggressive grants for brand new clear vitality options underneath the IIJA. The corporate’s contract with the town of Rialto to develop a complete microgrid resolution for a wastewater remedy plant and the most important bridge substitute undertaking on an Japanese U.S. railway line, the place IIJA funding performed an important position, additional demonstrates the corporate’s robust place to learn from authorities funding.

Contemplating these demand tendencies and the associated authorities funding, AECOM is well-positioned to realize backlog progress within the coming years, supporting its income progress. Moreover, the corporate has strategically diminished its publicity within the business actual property market over the previous 5 years and diversified into markets comparable to logistics, freight, distribution, aviation, and vitality and water utilities. This diversification technique helps offset the potential slowdown in business actual property markets and contributes to general income progress. Consequently, I keep a optimistic outlook on AECOM’s income progress prospects transferring ahead.

Margin Evaluation and Outlook

Within the second quarter of fiscal 2023, the segment-adjusted working margin improved by 60 foundation factors year-over-year to achieve 14.5%. This enchancment was pushed by effectivity features, profitable execution of backlog orders, and a good composition of high-margin tasks in backlog. The margin enlargement was additional supported by progress in each the Americas and Worldwide segments. Particularly, within the Americas phase, the adjusted working margin elevated by 100 foundation factors year-over-year to achieve 18.7%. Equally, within the worldwide phase, the adjusted working margin elevated by 30 foundation factors year-over-year to achieve 8.6%.

Wanting forward, I anticipate the corporate to see continued margin enlargement. AECOM has demonstrated self-discipline in deciding on tasks for its backlog, prioritizing these with increased margins and decrease danger. In accordance with administration, this strategic strategy has led to a 30% to 40% improve in margins throughout the backlog over the previous three years, and the corporate is witnessing continued enchancment within the trajectory of high-margin backlog progress. Administration has additionally expressed confidence in attaining double-digit margins within the worldwide enterprise within the subsequent fiscal yr, regardless of international change headwinds. That is attributed to securing massive undertaking wins with higher margin profiles than earlier than. These developments are anticipated to contribute to general margin progress going ahead.

Moreover, the corporate is actively engaged on enhancing operational effectivity. Investments in digital instruments allow present professionals to concentrate on high-value duties, leading to elevated capability and improved effectivity. This concentrate on effectivity is anticipated to additional help margin enlargement sooner or later. Contemplating these components, I keep an optimistic outlook on the corporate’s margin progress prospects.

Valuation and Conclusion

ACM is at present buying and selling at a price-to-earnings (P/E) a number of of twenty-two.73x the FY23 consensus EPS estimate of $3.75 and 19.34x the FY24 consensus estimate of $4.40. As compared, its peer Tetra Tech is buying and selling at a P/E of 32.04x the FY23 consensus estimate of $5.13 and 28.44x FY24 P/E of $5.78. Whereas the EPS progress fee for ACM is decrease than TTEK within the present yr, for the following two years ACM is anticipated to develop its EPS at a quicker tempo. This means that ACM is comparatively cheaper when it comes to valuation.

ACM has promising long-term progress prospects, pushed by components comparable to a wholesome backlog, improved win charges, favorable backlog composition with massive and high-margin tasks, ongoing demand tendencies, and potential federal infrastructure funding. Moreover, the corporate’s efforts to reinforce backlog composition and enhance effectivity are anticipated to help margin enlargement.

Contemplating these components, I imagine ACM presents a superb shopping for alternative and has the potential to outperform the market.