Infrastructure Spending And Federal Programs Will Support Stable Prospects Despite Pessimistic Assumptions

Catalysts

About AECOM

AECOM provides infrastructure, advisory, program management and design services across transportation, water, environment, facilities and energy markets globally.

What are the underlying business or industry changes driving this perspective?

• Government backed infrastructure programs such as the U.S. IIJA, the Big Beautiful Bill and the U.K. 10 year infrastructure plan are expected to support a multi year pipeline in transportation, water and energy. This directly influences visibility on NSR and future revenue timing.
• Rising demand for data centers and supporting power and water infrastructure, including U.S. data center investment that management expects could triple by 2030, creates opportunities across advisory, design and program management. This can shape NSR mix and fee rates.
• Global efforts to streamline permitting in the U.S., U.K. and Canada and to centralize approvals are intended to shorten project cycles and reduce bottlenecks. These efforts can affect backlog conversion speed, working capital needs and free cash flow consistency.
• The push by the U.S. federal government and the DoD to invest in critical infrastructure, defense facilities, aviation and Coast Guard assets is widening AECOM’s exposure to long duration federal work, with potential implications for revenue stability, segment margins and earnings resilience.
• Management’s emphasis on growing higher value advisory and program management so these areas contribute at least 50% of revenue over time, together with AI enabled delivery and enterprise capability centers, is expected to influence blended margins, return on capital and EPS quality.

Assumptions

How have these above catalysts been quantified?

• This narrative explores a more pessimistic perspective on AECOM compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming AECOM's revenue will grow by 5.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.9% today to 5.1% in 3 years time.
• The bearish analysts expect earnings to reach $944.9 million (and earnings per share of $7.97) by about July 2029, up from $631.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as $1.1 billion.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 14.8x on those 2029 earnings, up from 13.9x today. This future PE is lower than the current PE for the US Construction industry at 42.5x.
• The bearish analysts expect the number of shares outstanding to decline by 2.96% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.84%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Backlog, contracted backlog and pipeline are all at all-time highs with a 19 quarter streak of book to burn above 1, which could support higher NSR and earnings than implied by a flat share price view, especially if this converts efficiently into revenue and cash.
• Management has already reached a 17.1% segment adjusted operating margin and raised guidance to a 16.5% full year segment margin, ahead of prior timing, and continues to talk about further margin expansion from advisory, program management, enterprise capability centers and AI, which could lift net margins and EPS beyond what a flat share price would suggest.
• Government backed infrastructure spending, including the U.S. IIJA, the Big Beautiful Bill, the U.K. 10 year infrastructure strategy and strong state DOT budgets, is feeding into a growing early stage pipeline across transportation, water, energy and defense projects, which may support NSR growth and earnings over several years.
• Expansion of higher value advisory and program management, with advisory growing at a double digit pace and a goal to reach US$400 million of NSR within 3 years as part of a path to a US$1b platform, increases exposure to fee rich work that could raise blended margins and earnings quality.
• AI and automation are already cited as contributing to margins and productivity, and management expects AI to have a visible and material impact over the next 2 to 3 years, which could further improve utilization, lower delivery costs and support higher EBITDA and EPS than a flat share price scenario assumes.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for AECOM is $90.0, which represents up to two standard deviations below the consensus price target of $101.12. This valuation is based on what can be assumed as the expectations of AECOM's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $112.0, and the most bearish reporting a price target of just $90.0.
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be $18.5 billion, earnings will come to $944.9 million, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 9.8%.
• Given the current share price of $68.05, the analyst price target of $90.0 is 24.4% 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.