It's been three and a half years now since AECOM (ACM -0.75%) laid out $6 billion to acquire its rival URS Corp. In so doing, AECOM forged one of the nation's largest construction and engineering giants -- and set itself up to collect some really big contracts.
Long known as one of the Defense Department's go-to contractors when it needs really large-scale infrastructure work done, AECOM won another big contract last week -- nearly $1 billion big -- and it won it thanks to URS.
AECOM hasn't historically been well-known for its drones business. Maybe it should be? Image source: Getty Images.
Droning for dollars
As revealed in a March 9 digest of Defense Department contracts awarded, AECOM's URS subsidiary won a $961 million contract to provide "remotely piloted aircraft operations and maintenance support" to U.S. Air Force MQ-1 Predator, MQ-9 Reaper, and RQ-4 Global Hawk drones.
Although the contract announcement doesn't go into a whole lot of detail, it appears AECOM's role will include both maintaining the drones and also "supporting" drone pilot and sensor operations. It does not appear that AECOM employees are actually being hired to operate the drones, but rather to maintain and service the drones and their remote control systems.
On its website, AECOM describes its role (in relation to Predators and Reapers at least) as providing "engineers and cybersecurity technicians" to work on the drones' "mission systems," including "system configuration, monitoring user accounts and oversight of software licenses, software version control, crypto keys management, installation of security patches," and also "virus and malware scanning, intrusion and unauthorized activity detection, install patches, and control user access rights."
Potentially significant is the fact that AECOM's website currently refers to it performing these tasks in relation to Predator and Reaper drones, and in cooperation with their maker, privately held defense firm General Atomics. To date at least, AECOM has not described itself as having any role relevant to operations involving the RQ-4 Global Hawk, which is built by Northrop Grumman (NOC 1.82%).
Thus AECOM's contract win last week may represent an expansion of AECOM's relationship with the Air Force -- and with Northrop.
What it means to investors
An expansion of AECOM's business in the drone space, however, could be particularly lucrative for the company.
A review of the company's 10-K filing with the SEC suggests (but does not say specifically) that drone operations are probably located within AECOM's management services division. That division produces 18% of AECOM's annual revenues according to data from S&P Global Market Intelligence. But the division's 7.2% operating profit margins accounts helps to produce nearly 37% of the company's operating profit -- and is twice the 3.6% operating profit margin that AECOM as a whole earns.
The upshot for investors, then, is very simple: By paying $6 billion for URS three years ago, AECOM has secured for itself a nearly $1 billion contract today, and at very attractive profit margins. Given that all of AECOM's business already sells for an attractive valuation of just 10x free cash flow, and that the most profitable part of that business is about to get even bigger, I suspect this latest contract win might just be enough to convince investors to pull the trigger on AECOM stock.
But just in case it isn't, investors should recall that AECOM is also the only engineering firm involved in each of the several projects to commercialize Elon Musk's Hyperloop technology and, as one of the nation's leading construction firms, is also a likely beneficiary of President Trump's new $1.5 trillion national infrastructure program. Going forward, I see bright prospects for all of AECOM -- but for the drones business most of all.
