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Summary

  • Gross revenue down 4.8% Y/Y, operating income down 18.2%, EPS flat, new wins up 22% Y/Y and backlog up 22% Y/Y. Acquisition of URS expected to close in October.
  • I am reiterating my long thesis and my recent $36 target price, offering just a 7% upside within a year due to potential acquisition integration setbacks and revenue weakness.
  • The weak Q2 numbers further confirmed my already conservative outlook in my previous update. Integration of two large acquisitions at a time of falling organic sales will present a challenge.

AECOM Technology Corporation (NYSE:ACM) reported mixed results for the second quarter of 2014 (SEC filing, press release, presentation). AECOM reported fiscal third-quarter revenue of $2.0B, down 4.8% Y/Y and net service revenue (this excludes the pass-through revenue) of $1.2B, down 2.5% Y/Y. Operating income reached $92M, down 18.2% Y/Y and EPS equaled $0.70, flat Y/Y. However, there were also positive aspects, mainly the growing new wins and backlog, plus sequentially increasing EBITDA margins. New wins of $2.2B were up 18% while backlog was $20.5B, a 22% Y/Y jump, growing on the back of stronger construction services segment and growth markets, including Asia and Europe.

In terms of segments, the professional technical services fared relatively well with revenue down just 2.8% Y/Y but management support services cratered 21.3% Y/Y, primarily due to falling orders from the Department of Defense, specifically due to the migration of operations away from Afghanistan. AECOM has seen growth of non-governmental contracts in this segment as it tries to redirect sales from the governmental contracts. Cash flow from operations reached $80M, free cash flow was $63M and AECOM reaffirmed its fiscal 2014 target of cash flow at least equal to its net income. The company expects that full-year EPS will be in the range of $2.50 to $2.60, excluding the costs associated with the recent acquisitions.

I am reiterating my original long thesis, later updated here. My one-year target price is $36 per share, meaning AECOM has 7% upside. AECOM will be going through a risky period until it proves the acquisitions integration is working well and the organic sales fall can be stopped. On the other hand, the acquisitions will solidify AECOM's number one market position, so it should be able to defend its market share.

Source: Update: AECOM Technology Reports Mixed Q2 Results