INVESTMENT THESIS
AECOM (NYSE: ACM). ACM 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 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. It also has an unused $1.4 billion credit line. 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.
RECENT DEVELOPMENTS
On November 16, AECOM reported fiscal 4Q20 results. Adjusted revenue was unchanged at $3.57 billion. Reflecting management’s efforts to improve margins and the benefits of a near-record backlog, adjusted EBITDA held steady at $204 million. Adjusted earnings totaled $0.60, down 8% from the prior-year period, but above the consensus estimate of $0.57.
In the fourth-quarter press release, AECOM provided its FY21 EBITDA guidance of $790-$830 million. Management expects adjusted earnings of $2.55-$2.75 per share in FY21. The midpoint of this guidance represents 9% adjusted EBITDA growth and 23% adjusted EPS growth over FY20.
In FY20, adjusted revenue fell 3% to $13.2 billion, while EPS fell to $2.15 from $2.76 in FY19.
ACM plans and has used the sale proceeds to reduce debt and buy back shares.
EARNINGS & GROWTH ANALYSIS
With the sale of the Management Services business, the company reports results in three segments: Americas, International and ACM Capital.
In the Americas segment, revenue rose 2% to $2.7 billion, reflecting strength in the Construction Management business. Adjusted operating income decreased 3.7% to $157 million, driven by a decline in the Americas design business.
In the International division, revenue held steady at $831 million. Adjusted operating income increased to $41 million from $37 million reflecting the benefits of real estate restructuring and carefully managed G&A.
At AECOM Capital, third-quarter revenue totaled $5.6 million and operating income was $11.0 million, driven by the sale of a property that generated a greater than 20% return.
VALUATION
On November 19 at midday, BUY-rated ACM traded at $50.27, up $0.01.
Source: Argus
