US Infrastructure Push To Boost Revenue Growth And Transform Profitability

Key Takeaways

• Focus on infrastructure and regulatory changes is set to enhance AECOM's revenue and profitability prospects.
  
• Expansion into high-margin sectors and a strong backlog pipeline position AECOM for sustained growth in revenue and earnings.
  
• Caution in risk management decisions and reliance on U.S. federal funding could suppress short-term revenue growth and expose AECOM to political uncertainties.

Catalysts

Provides professional infrastructure consulting services worldwide.

• The incoming U.S. administration's focus on strong infrastructure investment, potentially boosting demand for AECOM's services, is expected to impact revenue growth positively.
  
• Streamlining regulations, such as permitting reform, can lead to increased project opportunities, which is anticipated to improve revenue and potentially margins.
  
• Expansion into new high-margin growth areas, such as the Water and Environment Advisory business, is projected to contribute to margin growth, enhancing overall profitability.
  
• AECOM's strategy of winning larger, more lucrative projects and maintaining high win and recompete rates may strengthen revenue and, consequently, earnings.
  
• The company's record backlog and pipeline, supported by high book-to-burn ratios, are seen as factors underpinning future revenue and earnings growth.

AECOM Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AECOM's revenue will grow by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 4.9% in 3 years time.
• Analysts expect earnings to reach $942.5 million (and earnings per share of $7.68) by about November 2027, up from $505.9 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 18.4x on those 2027 earnings, down from 28.8x today. This future PE is lower than the current PE for the US Construction industry at 34.7x.
• Analysts expect the number of shares outstanding to decline by 2.9% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.3%, as per the Simply Wall St company report.

AECOM Future Earnings Per Share Growth

Risks

• The decision not to proceed with an already awarded construction management project due to a change in the commercial risk profile indicates caution and a prioritization of risk management, which could suppress revenue growth in the near term.
  
• Discontinued operations and legacy project disputes, while settled and reducing risk, suggest past challenges that may undermine investor confidence, impacting AECOM's perceived stability and thus potentially its earnings.
  
• Heavy reliance on U.S. federal projects and funding, which constitutes 9% of revenue, exposes AECOM to political and administrative changes, potentially affecting revenue flow and profitability if infrastructure priorities shift.
  
• Competitive pressures in international markets may lead to aggressive pricing strategies to secure project wins, potentially impacting margins and profitability in those regions.
  
• The significant ongoing investments in organic growth and higher-margin businesses are beneficial long-term, but may weigh on margins and cash flow in the short term, as these costs are reflected in the income statement.

Valuation

• The analysts have a consensus price target of $114.78 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 $128.0, and the most bearish reporting a price target of just $93.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $19.1 billion, earnings will come to $942.5 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of $108.83, the analyst's price target of $114.78 is 5.2% 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.