Balanced Risk-Reward for AECOM Technology Corp. - Analyst Blog

On Mar 13, 2014, we issued an updated research report on AECOM Technology Corporation ACM. The company reported strong first-quarter fiscal 2014 results, which included a 2.78% positive surprise. Growth in the company's core business as well as its joint ventures (JVs) aided the quarterly results.

AECOM has delivered positive earnings surprises in three of the last four quarters, with an average beat of 3.39%.

Based on the impressive quarterly performance, the company raised its outlook for fiscal 2014. The company now expects earnings per share in the range of $2.50–$2.60 as compared with the prior guidance of $2.35–$2.45. The Zacks Consensus Estimate for fiscal 2014 earnings is currently pegged at $2.57 per share, well above the company's expectations.

AECOM's diversified portfolio comprises both designing and construction services. The company's business has been doing well in Europe, the Middle East and Asia. The AECOM Arabia JV also performed impressively well in the reported quarter after the company gained its control, having received the required consolidation. Moreover, the company is expected to benefit from recovery in the non-residential construction market across the globe, especially in the U.S.

This Zacks Rank #2 (Buy) technical service provider has been witnessing a steady improvement in its free cash flow, which stood at $117 million at the end of fiscal first-quarter 2014, surpassing the company's net income for the past seven quarters. The company, hence, continues to expect cumulative free cash flow to be between $1.3 billion and $1.8 billion from fiscal 2013 to fiscal 2017.

Furthermore, the company's backlogs increased 8% to $18.4 billion while new contract wins amounted to $3.7 billion in the quarter.

Among other initiatives to strengthen its operations, AECOM has been restructuring its Management Support Services (MSS) business to make it more profitable. The company plans to shift from higher-volume lower-margin international work to lower-volume higher-margin work in the U.S. The resultant decrease in volume is likely to impact the company's revenues and earnings until the desired margin levels are achieved.

The company derives a considerable share of revenues from government projects and hence, can be affected by changes in government rules and regulations. Additionally, projects included in the company's backlog are usually long-cycle in nature. As a result, these are often subject to cancellation risks or delays that could impact AECOM's operations and cash flows.

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