Shareholders of AECOM would probably like to forget the past six months even happened. The stock dropped 22% and now trades at $65.75. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is there a buying opportunity in AECOM, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why do we think AECOM will underperform?
Even though the stock has become cheaper, we’re cautious about AECOM. Here are three reasons why ACM doesn’t excite us, plus one stock we’d rather own.
1. Backlog is unchanged, sales pipeline stalls
Investors interested in engineering and design services companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into AECOM’s future revenue streams.
Over the last two years, AECOM failed to grow its backlog, which came in at $27.82 billion in the latest quarter. This performance was underwhelming and shows the company faced challenges in winning new orders. It also suggests there may be increasing competition or market saturation. 
2. EPS barely growing
We track the long-term change in earnings per share (EPS) because it highlights whether a company’s growth is profitable.
AECOM’s EPS grew at 7.4% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 2.6% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
3. Free cash flow margin dropping
Free cash flow isn’t a prominently featured metric in company financials and earnings releases, but we think it’s telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
As you can see below, AECOM’s margin dropped by 3.5 percentage points over the last five years. This along with its unexciting margin puts the company in a tough spot, and shareholders are likely hoping it can reverse course. If the trend continues, it could signal it’s becoming a more capital-intensive business. AECOM’s free cash flow margin for the trailing 12 months was 1.3%.
Final judgment
We see the value of companies helping their customers, but in the case of AECOM, we’re out. Following the recent decline, the stock trades at 11.2× forward P/E (or $65.75 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better stocks to buy right now. We’d recommend looking at our favorite semiconductor picks and shovels play.
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