Morningstar | Aecom Maintains Its Momentum and Keeps Growing Its Backlog; Raising Fair Value Estimate
We modestly lift our fair value estimate for Aecom from $35 to $36 after the no-moat engineering & construction firm posted a solid second quarter, with revenue and earnings both surpassing consensus expectations. Management reiterated its $2.60 to $2.90 adjusted EPS guidance range for full-year fiscal 2019. Our fair value estimate change is primarily due to time value of money since our previous update, as the earnings release did not materially alter our thesis.Aecom posted a 7% year-over-year increase in organic revenue, driven by 14% growth in management services and 8% growth in design & consulting services. Construction services grew sales 4% from the prior-year period. Aecom kept its strong momentum, growing its backlog to an all-time record of roughly $61 billion (versus $50 billion in second-quarter 2018).
We note that the relatively higher-margin design and consulting services and management services segments compose a growing portion of the firm’s backlog (around 68% currently, versus 62% a year ago). Furthermore, the $225 million G&A cost reduction plan is now complete, and management expects it to boost margins in design & consulting services to at least 7% in fiscal 2019 and 7.5% in fiscal 2020. We forecast that this favorable mix shift, coupled with cost reduction initiatives, will drive a roughly 150-basis-point operating margin expansion over the next few years.
Aecom is in the process of exiting over 30 countries as well as several businesses including fixed-price combined cycle gas power plant construction, at-risk oil and gas construction, and international at-risk construction projects. Management also said that it’s evaluating all at-risk construction exposure, as it continues efforts to derisk the firm’s portfolio. We are encouraged by management’s focus on growing the higher-margin design & consulting services and management services segments, and we think the changes will result in a less volatile and more profitable portfolio.
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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