AECOM (ACM) Q1 Earnings Top, Revenues Fall Y/Y; Stock Up

AECOM's ACM adjusted earnings per share for second-quarter fiscal 2016 came in at 87 cents, which surpassed the Zacks Consensus Estimate of 72 cents by 20.8%. Also, the bottom line witnessed 50% growth from the year-ago tally of 58 cents.

The decent bottom-line performance cheered investors as shares of the company rose almost 2% to close at $31.95 on Tuesday.

Adjusted earnings were boosted by solid execution on projects and diversified operations. Also, fall in cost of revenues and selling & administrative expenses coupled with lower expenses from acquisitions & integration boosted the bottom line.

Inside the Headlines

For second-quarter fiscal 2016, revenues declined 2.8% year over year to $4,381.3 million.

The dismal top-line performance can be largely attributed to the waning sales in the Design & Consulting Services and Construction Services segments.

Segment-wise, Design & Consulting Services revenues edged down 3.4% year over year to $1,966.2 million. Also, on a constant currency basis, organic revenues declined 0.6%. Improved market conditions in the U.K. and America, after an extended period of lackluster performance, acted as growth drivers. However, this segment was hurt by unimpressive sales in selected geographies of the Asia-Pacific and Middle East regions.

Construction Services revenues fell 5.8% to $1,546.2 million on a year-over-year basis. Also, on a constant currency basis, organic revenues declined 1.3%. Stellar performance in the building construction business line was largely thwarted by the massive decline in oil and gas business (on account of the low oil prices).

On the other hand, Management Services revenues registered a 4.8% decline to $869.0 million on a year-over-year basis. Also, on a constant currency basis, organic revenues increased 5%. Concerted benefit programs undertaken by the company resulted in an acceleration of cost recovery on federal contract pension entitlement, which in turn drove the top line at this segment.

However, AECOM's adjusted operating income for second-quarter fiscal 2016 stood at $268.6 million, up from the year-ago tally of $209.8 million. Improvement in operating income was largely driven by cost synergies and strong execution capabilities of the company.

New order wins in the quarter totaled $2.7 billion, mainly driven by healthy gains from the Design & Consulting Services division, which in turn benefited from the recovery in America. Also, AECOM's total book-to-burn ratio during the quarter stood at 0.6, aiding growth in new orders. At the end of the fiscal second quarter, AECOM's total backlog was $38,613.9 million, down 5.2%.

Liquidity and Cash Flow

As of Mar 31, 2016, AECOM's cash and cash equivalents totaled $669.8 million compared with $683.9 million as of Sep 30, 2015. Total debt was $4,472.6 million versus $4,606.9 million on Sep 30, 2015.

In the second quarter of fiscal 2016, AECOM generated free cash flow of $82.9 million, up 327.3% on a year-over-year basis and in sync with its free cash flow target of $600–$800 million for fiscals 2016 and 2017.

2016 Guidance

AECOM reiterated its full-year fiscal 2016 guidance for adjusted earnings at the range of $3.00–$3.40 per share.

Also, AECOM expects to exit the fiscal with synergy savings run-rate of $275 million and expenses of $200 million from acquisition and integration activities. Additionally, for full-year 2016, interest expense, excluding acquisition-related amortization, is predicted at around $210 million. Despite these expenditures, AECOM is well on track to achieve its $325-million run-rate synergy savings target by the end of fiscal 2017.

Our Take

Going forward, we believe AECOM's Design and Consulting Services segment has bountiful opportunities as the Americas region is back on growth track, primarily fuelled by remarkable domestic transportation markets. The recently passed a $305 billion worth of 5-year transportation bill, FAST Act, which is expected to result in $60 billion worth of projects, propelling growth for the company. In addition, budding prospects in the Construction Services and Management Services businesses coupled with the company's healthy liquidity position adds to its strength.

AECOM currently has a Zacks Rank #2 (Buy). Other favorably ranked stocks include SPX FLOW, Inc. FLOW, Xylem Inc. XYL amd IDEX Corp. IEX. While SPX FLOW sports a Zacks Rank #1 (Strong Buy), both Xylem and IDEX Corp. hold a Zacks Rank #2.

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