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Read This Before You Buy AECOM Stock

By Reuben Gregg Brewer - Updated Oct 5, 2018 at 11:58AM

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AECOM is all about construction, which is both good and bad.

AECOM (NYSE: ACM) is one of the largest public construction and engineering companies. On one hand, it's a very basic business, but there are some things going on behind the scenes that you need to understand before you buy AECOM stock, particularly if the swift advance from mid-January is what caught your eye. Here are a few key points.

Diversification is important
AECOM's breaks its business down into three segments: design and consulting services (around 45% of revenue), construction services (a touch under 40%), and management services (almost 20%). There are a lot of connecting points across the three, but they also provide important diversification. For example, because AECOM is so well versed in taking major projects from the drawing board to completion, it has a skill set that allows it to sell its project management services.

Case in point: Although there are nuclear power plants being built around the world as you read this , there's also a need to handle the decommissioning of older nuclear power plants that are set to close -- an often long and tedious process. That's a niche that AECOM's project management and construction skills set it up to serve. But this isn't the only type of diversification going on.

Image source: AECOM.

For example, about half the company's revenue comes from private sources and the rest from governments. And AECOM serves six end markets, including industrial, federal, transportation, environmental, oil and gas, and power. So there are a lot of moving parts and a lot of places for the company to grow its business.

Now, that having been said, there are some notable concentration points to think about. For example, the United States accounts for about 70% of revenues. On one hand, the United States is a nice, stable country. On the other hand, if something should happen in the U.S. market, like a recession, AECOM would probably feel the hit on the top and bottom lines.

Indeed, during the 2007 to 2009 recession, revenues and earnings basically moved sideways for around five quarters. And even within the market segments AECOM serves, some are more important than others; Industrial, federal, and transportation make up nearly 80% of the business, so its worth watching these spaces closely.

To be fair, an engineering and construction company only has just so many places it can put its skills to work. So it looks as if AECOM is pretty well situated. However, you should be watching the U.S. market closely if you buy AECOM stock, and looking to see if AECOM not only maintains its current business diversification but also maybe even improves it by expanding overseas and broadening its footprint in its smaller markets.

For example, one of the key highlights for the company's construction business last year was that 60% of its contract wins were outside of its core New York market. During the fourth quarter conference call, the company highlighted landing three projects in the U.K. in the back half of 2015. CEO Michael Burke also made sure to mention that southeast Asia and India are two markets for which the company has high expectations. More diversification of this sort should help the company survive hard times when they eventually arrive.

We haven't done that yet
Another big issue to keep an eye on at AECOM is backlog. This is work that the company has contracted to do, but that it hasn't done just yet. It helps give some visibility to revenues and earnings and can provide a tangible bridge to better times when there's an economic slowdown.

AECOM's backlog ended the fiscal first quarter at around $40.2 billion. That was down slightly year over year. The company signed roughly $4.4 billion in new contracts in the quarter and had revenues of around $4.2 billion.

A plant sprouts from a pile of coins.

Image source: Getty Images.

There are a couple of things to get from these numbers. First, the backlog represents about two years' worth of work at a quarterly run rate of $4 billion or so. That gives the company some cushion should there be a downturn. Second, AECOM inked more in new deals than it worked off (this is something often called the book-to-burn ratio). That's good, because it means there was more new work coming in than old work being completed.

To be fair, backlogs aren't guaranteed. Projects get shelved and budgets get cut. And revenues can be lumpy when you're talking about big construction projects, which makes backlog (let alone revenues and earnings) more of a moving target at times. But these are still important numbers to watch. And right now, AECOM seems to be on solid ground -- which is a good thing, since the current economic advance, though it's been middling at best, is getting a bit long in the tooth.

There's a need
In the end, AECOM is a giant in an industry that does giant things. And there's a good reason to expect the future to be generally bright, overall. For example, emerging nations need to upgrade their infrastructure to support their economic progress. And developed nations, like the United States, have aging infrastructure in need of replacement and repair. Before you buy AECOM, however, get to know it a little better by understanding whom it works for, where it works, and how much work it has lined up. There's nothing to be concerned about with any of these factors today, but you should get to know the dynamics driving AECOM before you jump aboard.

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