Over the past six months, AECOM’s shares (currently trading at $99.42) have posted a disappointing 13.2% loss, well below the S&P 500’s 11.1% gain. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
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Why Is AECOM Not Exciting?
Even with the cheaper entry price, we're swiping left on AECOM for now. Here are three reasons we avoid ACM and a stock we'd rather own.
1. Backlog Declines as Orders Drop
Investors interested in Engineering and Design Services companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into AECOM’s future revenue streams.
AECOM’s backlog came in at $24.83 billion in the latest quarter, and it averaged 2.7% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect AECOM’s revenue to drop by 5.3%, a decrease from its 4% annualized growth for the past five years. This projection is underwhelming and implies its products and services will see some demand headwinds.
3. Weak Operating Margin Could Cause Trouble
Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.
AECOM was profitable over the last five years but held back by its large cost base. Its average operating margin of 4.7% was weak for an industrials business.
Final Judgment
AECOM isn’t a terrible business, but it doesn’t pass our bar. After the recent drawdown, the stock trades at 18.9× forward P/E (or $99.42 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better stocks to buy right now. We’d recommend looking at one of our top software and edge computing picks.
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