Over the last six months, AECOM’s shares have sunk to $99.63, producing a disappointing 13% loss - a stark contrast to the S&P 500’s 10.4% gain. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in AECOM, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is AECOM Not Exciting?
Even with the cheaper entry price, we don't have much confidence in AECOM. Here are three reasons we avoid ACM and a stock we'd rather own.
1. Backlog Declines as Orders Drop
We can better understand Engineering and Design Services companies by analyzing their backlog. 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 indicates its products and services will face some demand challenges.
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 quality test. After the recent drawdown, the stock trades at 18.8× forward P/E (or $99.63 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
Stocks We Would Buy Instead of AECOM
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