AI Initiatives And IIJA Funding Will Strengthen Future Infrastructure Projects

Key Takeaways

• AECOM aims for revenue growth through disaster response projects and the expansion of its high-margin professional services and Water & Environment Advisory business.
  
• Investments in digital solutions and AI aim to boost operational efficiency, potentially expanding margins and supporting future EPS growth alongside shareholder returns.
  
• AECOM's dependence on government infrastructure funding and political stability poses risks to revenue amid potential policy changes and international market fluctuations.

Catalysts

Provides professional infrastructure consulting services for governments, businesses, and organizations worldwide.

• AECOM is leveraging its highly skilled teams to support disaster response and reconstruction efforts, particularly in regions affected by events such as the fires in Southern California. This positions the company to potentially capture increased revenue from federal and state-funded recovery projects and future infrastructure resilience work.
  
• The company is expanding its addressable market through the growth of high-margin professional services, such as its Water & Environment Advisory business. With expectations to significantly increase revenue in these segments over the next few years, this could positively impact both revenue and net margins.
  
• AECOM’s investments in digital delivery and AI-driven solutions aim to enhance operational efficiencies and reduce project delivery costs. This is expected to contribute to margin expansion, with a target of achieving a 17% operating margin by fiscal 2026.
  
• AECOM’s strong backlog growth, particularly in the Americas, is supported by robust funding from initiatives such as the Infrastructure Investment and Jobs Act (IIJA), providing significant visibility into sustained revenue growth over the coming years.
  
• The company’s commitment to shareholder returns through a substantial share repurchase authorization and dividend growth, alongside its focus on high-returning capital allocation, is expected to drive earnings per share (EPS) growth.

AECOM Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AECOM's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 4.7% in 3 years time.
• Analysts expect earnings to reach $887.9 million (and earnings per share of $6.98) by about April 2028, up from $586.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.5x on those 2028 earnings, up from 19.7x today. This future PE is about the same as the current PE for the US Construction industry at 20.5x.
• Analysts expect the number of shares outstanding to decline by 2.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.66%, as per the Simply Wall St company report.

AECOM Future Earnings Per Share Growth

Risks

• AECOM's exposure to the Trump administration's specific economic initiatives may face shifts if there are political or policy changes, potentially impacting their revenue and growth projections in the U.S.
  
• There is limited growth momentum in certain international markets like Australia and parts of the UK, impacting overall international revenue performance and margins.
  
• The company’s strong reliance on government infrastructure funding, especially from the IIJA, may pose risks if there are delays or changes in the anticipated project rollouts, affecting future revenues.
  
• The growth strategy includes significant investments in the Water & Environment Advisory business and digital transformations, which might not yield the expected returns, thereby impacting net margins.
  
• Despite strong current performance, foreign exchange headwinds and fluctuations in global markets could negatively affect revenue and earnings projections if not adequately managed.

Valuation

• The analysts have a consensus price target of $119.818 for AECOM based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $140.0, and the most bearish reporting a price target of just $102.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $18.9 billion, earnings will come to $887.9 million, and it would be trading on a PE ratio of 20.5x, assuming you use a discount rate of 7.7%.
• Given the current share price of $87.19, the analyst price target of $119.82 is 27.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.