On November 12th before the market opens AECOM (ACM) will report earnings for the fourth quarter of 2018. The technical services firm specializing in infrastructure development has been trading low since a substantial decline in February. Shares topped out around $40, the top of the 52-week range and have fallen below $30 establishing a new 52-week low. The bearish trend coupled with a downgrade in August from Buy to Hold from Argus suggests investors are wary to move into ACM stock. Keep an eye out for another solid earnings report which could provide support for a reversal to $32 and possibly higher.
ACM earnings have undergone a reversal in the past three years. In the last three quarters of 2016, ACM posted year-over-year revenue contractions as high as -8.5 percent. It capped a streak of six quarters where ACM failed to beat Wall Street estimates for revenue. However, the trend in revenue growth reversed in 2017 going from 1.4 percent year-over-year growth in the first quarter to 12.5 percent growth in the fourth quarter. The trend continued in the first three quarters of 2018 culminating in 13 percent growth in last quarter. Investors will be watching the upcoming earnings report to see if the growth will continue at the same pace.
ACM’s management were pleased with the results of the last quarter. As mentioned before, the company posted a new high for revenue of $5.1 billion per the third quarter conference call. Wins for the quarter were $9.4 billion which was another new high. ACM also posted a highly encouraging $54 billion backlog, another high, which solidifies future earnings growth. Nothing about the numbers created a bearish image for investors to point to suggesting the technical and fundamental ideas of ACM are at odds. With shares trading near support levels, it seems one more confirmation of high growth could convince investors to be bullish.
In the infrastructure industry, the value of a company is strongly influence on its ability to get new projects and maintain consistent revenue generation. ACM’s price-to-sales (P/S) ratio shows that its ability to generate sales has been undervalued for some time. Since the start of 2017 (when the sales growth trend reversed), the sales valuation has slowly fallen to 2016 levels when sales growth was dismal. A simple comparison of those two situations suggests there is strong case for ACM being undervalued, even in the context of a bearish market after a poor October.
Generating sales has never really been a problem for ACM which consistently posts higher revenue. However, maintaining a stable margin quarter by quarter has been a different story. Last quarter, EBITDA margin was about 34 basis points lower than a year before at 4.22 percent. Interestingly enough, this was higher than all three of the quarters before when it fell below 4 percent. The failure to scale costs probably left investors skeptical bottom line growth could keep pace with sales contributing to the pessimism that sent the stock price lower. Management decided to counter that sentiment by announcing a $150 million accelerated share repurchase last quarter. In the upcoming report, management will definitely be looking to drive their point home to spark a reversal.
From Q3 slides
ACM’s success in revenue comes from a diverse portfolio that expands across different geographies and end markets. Based on the mix defined in the previous quarter, the company looks well placed for growth. With 75 percent of revenue coming from inside the United States, ACM can avoid tensions from trade wars by relying on projects domestically. On top of that, President Trump’s pro-business agenda and passing of lower corporate taxes almost a year ago will continue to create an environment for private businesses (which comprise 48 percent of funding sources) to spend money confidently. The last GDP release revealed robust growth in technical, professional, and scientific sources of 9.3 percent in the second quarter of 2018, and a strong initial estimate of 3.5 percent GDP growth in the third quarter suggests a similarly robust reading could be due soon.
Of course, there are a few geopolitical risks that keep sentiment from being entirely positive. Many industrials have alluded to rising material costs as a result of the tariffs imposed by President Trump. While ACM does have a solid footing in the U.S., its status as a multinational firm leaves it vulnerable to these rising costs as well. In addition to rising material costs, ACM’s clients will inevitably see a rise in financing costs as the Federal Reserve continues to increase interest rates through 2019. This might have an adverse effect on its private funding source segment of 48 percent but will be offset by federal and local government projects which shouldn’t be affected as much.
An investor looking at the trend in ACM’s price might assume that the company has been struggling in 2018, but that is not the case. In the last quarter, an all-time sales high of $5.1 billion was reported as well as a 16 percent year-over-year growth to $53.8 billion in backlog, almost $4 billion higher quarter-over-quarter. The company looks to be a little oversold at the moment especially when comparing the 2016 and 2018 fundamental situations. Unless a negative reversal in macroeconomic forces causes an abrupt halt in private construction spending, this company could be bought before earnings with the intention of holding through a reversal.
Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in ACM over the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.