Aecom, Fluor Are Buys In The Engineering And Construction Space, Baird Says

For engineering and construction investors, it’s all about projects, projects, projects. And there's no shortage of projects in 2018, according to one Wall Street analyst.

The Analyst

Baird analyst Andrew Wittmann initiated coverage of Aecom ACM with an Outperform and raised the price target from $40 to $45. Wittmann also upgraded Fluor Corporation (NEW) FLR from Neutral to Outperform and raised the price target from $48 to $61.

The Thesis

The outlook for engineering and construction stocks is better than it has been in several years, and most of the stocks in the sector actually trade at a valuation discount to the broader market, Wittmann said in a Wednesday note. (See the analyst's track record here.) 

After several years of restructuring among top companies in the space, Wittmann said balance sheets and operations are in much better shape heading into the next upcycle.

“E&C industry fundamentals offer some of their better growth prospects in years with nearly all major end-market verticals participating." 

Aecom is a top play in U.S. infrastructure spending, the analyst said. Aecom has logged several quarters of strong organic revenue growth, and its backlog is up 8 percent compared to a year ago, according to Baird. The company's nearly 10-percent free cash flow yield is paving the way to debt repayment and eventually a capital return plan, Wittmann said. 

Fluor is resetting its business by getting its cash burn under control, and previous problem projects are now coming to a close. Wittmann said. Awards fell to a 15-year low in the first quarter of 2017, but Wittmann said he sees the stock as an attractive contrarian play on a recent uptick in awards coupled with rock-bottom Wall Street expectations. The company’s solid balance sheet limits potential downside, he said. 

Price Action

Fluor shares were trading higher by 1.18 percent and Aecom stock traded higher by 2.47 percent at the time of publication on Wednesday afternoon. 

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Posted In: Andrew WittmannBairdconstructionengineeringAnalyst ColorLong IdeasInitiationAnalyst RatingsTrading Ideas

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