We recently initiated our coverage on AECOM Technology Corporation (ACM), a professional, technical and management support services provider, with an Underperform recommendation.
Why Underperform?
AECOM specializes in providing integrated services for planning, construction and maintenance of infrastructures that include consulting, architecture, engineering as well as managing the requirements for energy, water and environment.
The company is experiencing slower-than-expected growth on both the top- and bottom-lines. Though AECOM is gaining from the ongoing recovery in the U.S. non-residential construction market, sluggish federal demand remains a challenge.
Furthermore, declining demand from Australia was a drag for the company’s revenues in 2013, and the situation is likely to continue in 2014. The company continued to benefit from its Professional technical services segment, but the weak performance of the Management Support Services segment continues to be a matter of concern.
The company’s business in Australia has been sluggish primarily due to the weakness in the mining sector. Also, the projects included in the company’s backlog are usually long-cycle projects, which run the risks of getting delayed or cancelled; thereby impacting AECOM’s operations and cash flows.
AECOM has been planning to reposition its MSS (Management Support Services) 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.
Other Stocks to Consider
AECOM currently has a Zacks Rank #4 (Sell). Other stocks worth considering include AO Smith Corp. (AOS) with a Zacks Rank #1 (Strong Buy) and Plug Power Inc. (PLUG) and EnerSys (ENS), both carrying a Zacks Rank #2 (Buy).
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