AECOM’s stock price has taken a beating over the past six months, shedding 28.7% of its value and falling to $91.09 per share. This might have investors contemplating their next move.
Is now the time to buy AECOM, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.
Why Is AECOM Not Exciting?
Even with the cheaper entry price, we don't have much confidence in AECOM. Here are three reasons we avoid ACM and a stock we'd rather own.
1. Backlog Declines as Orders Drop
We can better understand Engineering and Design Services companies by analyzing their backlog. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into AECOM’s future revenue streams.
AECOM’s backlog came in at $25.96 billion in the latest quarter, and it averaged 4% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation. 
2. Weak Operating Margin Could Cause Trouble
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
AECOM was profitable over the last five years but held back by its large cost base. Its average operating margin of 4.8% was weak for an industrials business.
3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
AECOM has shown weak cash profitability relative to peers over the last five years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 4.4%, below what we’d expect for an industrials business.
Final Judgment
AECOM isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 14.9× forward P/E (or $91.09 per share). This valuation multiple is fair, but we don’t have much faith in the company. We're fairly confident there are better investments elsewhere. We’d recommend looking at the most dominant software business in the world.
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