Morningstar | ACM Updated Forecasts and Estimates from 23 Apr 2019
After taking a fresh look at no-moat engineering and construction firm Aecom, we lower our fair value estimate to $35 from $37 per share. The reduction in our fair value estimate is primarily driven by a more conservative midcycle operating margin assumption, which we lowered to roughly 4.5% from nearly 5%. We believe the stock is currently fairly valued.Aecom’s backlog at Dec. 31 stood at an all-time high of $59.5 billion, compared with $48.8 billion at Dec. 31, 2017. As the relatively higher-margin design and consulting services and management services segments constitute a growing portion of the company’s backlog (roughly 65% at the end of fiscal 2018 versus 60% at the end of fiscal 2017), we expect favorable mix shift, coupled with management’s recent $225 million general and administrative cost reduction initiative, to drive an operating margin expansion over the next few years. We also expect that Aecom’s diversified portfolio will allow the firm to take advantage of growth opportunities in segments with favorable long-term trends, such as transportation and water.
Furthermore, we reiterate our no-moat and stable moat trend ratings. We believe that most engineering & construction firms, including Aecom, lack economic moats due to an unfavorable industry structure. A fragmented industry, powerful customers, and the prevalence of projects with standardized specifications lead to intense price-based competition and limited opportunities for differentiation. Industry cyclicality and the risk of negative events (such as cost overruns and legal disputes) have historically driven relatively volatile returns on invested capital, and we don’t expect that to change. In the long run, we expect Aecom to earn average returns on invested capital roughly in line with its cost of capital.
AECOM designs, builds, finances and operates infrastructure assets for governments, businesses and organizations. The company provides: planning, consulting, architectural and engineering design services to commercial and government clients in transportation, facilities, environmental, energy, water and government markets; construction services, including building construction and energy, infrastructure and industrial construction; as well as program and facilities management and maintenance, training, logistics, consulting, technical assistance, and systems integration and information technology services, for agencies of the United States government and for other national governments.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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