Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...
If you want to invest in Hyperloop -- Elon Musk's game-changing plan to build a vacuum-sealed, near-Mach-speed train connecting major cities -- there may be no better way to do that than by buying shares of AECOM (ACM 0.42%) stock.
One of America's foremost construction and engineering firms, AECOM has been tapped to assist with Hyperloop pilot projects by no fewer than three separate Hyperloop pioneers: Hyperloop One, Hyperloop Transportation Technologies, and SpaceX. And yet, despite AECOM's apparent popularity among fans of Musk's massive model train experiment, one major Wall Street player doesn't like AECOM stock. At all.
This morning, British investment banker Barclays announced it is initiating coverage of AECOM stock with an underweight rating (i.e., sell) and a $34 price target, implying about 12% downside in the stock price. Here are three things you need to know about that.
1. Like, dislike?
As reported on StreetInsider.com (subscription required) this morning, Barclays thinks investors should sell AECOM -- not because it's a bad company exactly (in fact, Barclays says it likes AECOM's long-term prospects) -- but because, to date, AECOM has failed "to deliver on organic growth." And Barclays kind of has a point.
According to data from S&P Global Market Intelligence, over the past 12 months, AECOM has reported revenue of $18.2 billion. On the one hand, that's more than twice the $8.2 billion in revenue it reported in 2013. On the other hand, though, almost all of that growth came from AECOM's mid-2014 acquisition of URS Corporation. Since digesting URS, AECOM's revenue has grown by a grand total of 1.1% over the past two years.
2. Promises, promises
But if this is a problem that's been ongoing for two years, then why is Barclays only warning investors away from AECOM today? The answer is that yesterday, AECOM held an investor day to update its shareholders on its plans for future growth.
As AECOM explained, from now through fiscal year 2022, AECOM intends to produce organic revenue growth of 5% or better annually. Moreover the company is promising "adjusted EPS" growth two to three times as fast as revenue growth -- 12% to 15%. Finally, management says that it expects to throw off "cumulative free cash flow" of $3.5 billion or more over these next five years -- about $700 million per year.
AECOM CEO Michael S. Burke told investors that AECOM's "accelerating revenue growth, record wins and backlog, and continued strong free cash flow" are what will make these growth numbers possible.
3. Trust, but verify
All of which sounds pretty good, and responsive to (or rather, anticipatory of) Barclays' concerns about organic growth. But is it realistic? Aside from its acquisitions, AECOM has shown little to no ability to grow its revenue in years past, so what makes management so certain that it can change its story going forward?
Actually, AECOM answered this question, too -- in its fiscal 2017 end-of-year conference call, which you can read a transcript of right here. Therein, AECOM management confirmed that in fiscal Q4 it won $23 billion worth of new contracts and its "backlog increased by 11% to a new all-time high of nearly $48 billion." If you trust that growth in backlog will eventually translate into growth in revenue as those backlog contracts are executed, then it follows that AECOM will be able to grow at "5% or better" going forward.
Furthermore, it doesn't require a great leap of faith to imagine how greater revenue might permit AECOM to operate with greater efficiency -- enabling even faster growth in profits. As regards free cash flow production, well, S&P Global data confirm that AECOM routinely produces cash profits far in excess of its reported profitability under GAAP. Over the past 12 months, for example, AECOM generated positive free cash flow of more than $610 million.
With faster revenue growth -- and the backlog numbers to support it -- I have little difficulty in believing that over the next five years, AECOM can deliver on its promise of $700 million in annual free cash flow production. What's more, at a market capitalization of less than $6 billion, and a resulting forward price-to-free-cash-flow ratio of just 8.5, I think AECOM stock just might be the opposite of what Barclays says it is today.
With or without Elon Musk's Hyperloop to speed its growth along, I wonder if AECOM stock might not be a sell at all -- but instead a buy?