LA '28 Games And US Infrastructure Will Create Opportunities

Key Takeaways

• AECOM's role in the LA '28 Olympics and strong project backlog are expected to boost future revenue and improve margins.
  
• Strategic focus on high-margin services and efficiency improvements, alongside share repurchases, are set to enhance margin expansion and EPS growth.
  
• Economic uncertainties and political shifts could disrupt AECOM's project timelines, revenue growth, client demand, and margin expansion across various markets.

Catalysts

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

• AECOM's recent designation as the sole venue infrastructure partner for the LA '28 Olympic and Paralympic Games is expected to drive future revenue growth due to the extensive scope of work involved.
  
• The company's record-high backlog and pipeline, particularly from high-margin advisory and program management services, suggest potential for future revenue increases and improved margins.
  
• Ongoing federal funding for infrastructure in the U.S. tied to IIJA and aging infrastructure demands create a favorable environment for AECOM's revenue growth and sustained earnings.
  
• AECOM's strategic focus on increasing the share of high-margin advisory services, alongside efficiency improvements through technology and enterprise capability centers, is likely to drive future margin expansion.
  
• The capital allocation strategy, including significant share repurchases backed by strong free cash flow generation, supports the potential for EPS growth.

AECOM Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AECOM's revenue will grow by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.9% today to 5.0% in 3 years time.
• Analysts expect earnings to reach $922.6 million (and earnings per share of $7.34) by about July 2028, up from $629.3 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 21.0x on those 2028 earnings, down from 23.6x today. This future PE is lower than the current PE for the US Construction industry at 33.6x.
• Analysts expect the number of shares outstanding to decline by 1.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.1%, as per the Simply Wall St company report.

AECOM Future Earnings Per Share Growth

Risks

• The anticipated macroeconomic volatility and disruptions due to changing political dynamics and policy shifts, such as those after elections, could delay projects and decisions, potentially impacting AECOM's revenue growth and backlog stability.
  
• Isolated delays and deferred decisions on specific projects, exacerbated by changes in government administrations, could affect AECOM's revenue recognition and result in missed growth targets.
  
• AECOM's international markets show varied near-term trends, with larger projects facing delays due to budgetary challenges, which may hinder net service revenue growth and overall margin expansion.
  
• The high margins in AECOM’s advisory and program management business may be undermined by potential slowdowns in client demand due to economic uncertainties, affecting the company’s ability to sustain or improve net margins.
  
• Current macroeconomic uncertainties and potential further disruptions may lead to a cautious client spending environment in AECOM's private sector and international markets, impacting the company’s ability to drive consistent revenue growth.
  ```

Valuation

• The analysts have a consensus price target of $121.921 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 $104.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $18.6 billion, earnings will come to $922.6 million, and it would be trading on a PE ratio of 21.0x, assuming you use a discount rate of 8.1%.
• Given the current share price of $112.44, the analyst price target of $121.92 is 7.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.