Morningstar | Aecom Reports Solid Organic Growth and Record Backlog; Maintaining our FVE. See Updated Analyst Note from 07 Aug 2018
We expect to maintain our $37 fair value estimate for no-moat engineering and construction firm Aecom following solid third-quarter results which included record revenue and backlog figures.The company reported third-quarter adjusted earnings per share of $0.62 as compared with a tax credit-aided $0.78 a year ago. Most reported metrics supported evidence of consistent progress toward key goals. This included 10% organic growth, a record $9.4 billion in wins, and a 15% increase in adjusted EBITDA. Backlog reached an all-time high of $54 billion, up 16% from a year ago, with much of the increase coming from longer duration projects.
Given these results, management reiterated full-year adjusted EPS guidance of $2.50 to $2.90, adjusted EBITDA guidance of $880 million, and free cash flow guidance at the low end of the $600 to $800 million range. Management also reiterated its intention to exit noncore businesses in oil and gas. We think these targets are reasonable considering lower income tax rates and continued organic growth.
The design & consulting services segment reported 12% organic revenue growth due to strength in its business in the Americas. This segment also added 9% in backlog growth and an adjusted operating margin of 6.1%. The management services segment reported 9% organic revenue growth, with margins performing as expected. Finally, the construction services segment provided 8% of organic growth, with a muted operating margin of 1.8%.
Management reiterated its capital allocation strategy, which includes achieving a 2.5 times net leverage target and returning cash to shareholders. To this end, Aecom announced that it will buy back $150 million in shares, which is the first part of a plan to ultimately engage in $1 billion worth of buybacks. This strategy marks a departure from the M&A fueled growth of the past several years.
The company now intends to focus on pursuing organic growth that will be aided by increased business spending and broadly improving demand. This plan appears to have been working, with organic growth having been achieved in each of the last seven quarters.
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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