What a brutal six months it’s been for AECOM. The stock has dropped 31.4% and now trades at $71.28, rattling many shareholders. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.
Is now the time to buy AECOM, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is AECOM Not Exciting?
Despite the more favorable entry price, we’re cautious about AECOM. Here are three reasons why ACM doesn’t excite us, plus one stock we’d rather own.
1. Backlog Declines as Orders Drop
In addition to reported revenue, backlog is a useful data point for analyzing Engineering and Design Services companies. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into AECOM’s future revenue streams.
AECOM’s backlog came in at $26.2 billion in the latest quarter, and it averaged 2% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect AECOM’s revenue to rise by 4%. While this projection indicates its newer products and services will fuel better top-line performance, it is still below average for the sector.
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 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 2.6%.
Final Judgment
AECOM’s business quality ultimately falls short of our standards. After the recent drawdown, the stock trades at 11.8× forward P/E (or $71.28 per share). This valuation multiple is fair, but we don’t have much faith in the company. We’re pretty confident there are more exciting stocks to buy at the moment. We’d suggest looking at one of our top digital advertising picks.
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