AECOM: Undervalued Even Before Infrastructure Spending

When we think of infrastructure projects, especially with the ongoing debate in the United States on the $1 to $2.5 trillion infrastructure spending bill, few other companies have a business overview so specifically describing the work that gets done than does AECOM (NYSE:ACM).

AECOM offers construction and program management. They engage in planning, consulting, architectural, engineering, and construction management services for commercial and government clients. It also provides building construction and energy, as well as infrastructure and industrial construction services. It serves the transportation, water, government, facilities, environmental, and energy sectors, which are all set to benefit from any potential infrastructure spending bill in the United States. As the company also serves the EMEA region, infrastructure spending is set to increase there as well, as this type of spending is seen as one of the fastest ways to overcome the COVID-19 pandemic slump on the economy.

With AECOM’s organic sales streams, they’re expected to do quite well over the next few years independently of any potential spending bill. When we look at the company’s offerings and combine that with the potential for hundreds of billions of dollars coming into the various industries they operate in, it turns from good to great when we think of the company’s long-term prospects.

AECOM’s operations incredibly sustainable

Since infrastructure spending comes in very rarely and when it does it comes in force, the ability of a company to bid and then meet projects all over the country are important to their potential success. AECOM is no different, and for the company to enjoy the fruits of a strong infrastructure spending bill, they must be in a position to meet the demand. And they are.

The company holds just under $1 billion in cash and equivalents and has a record $1.07 billion in net property plant & equipment, making them ready to meet the demand for various infrastructure projects. They have also been using their stronger financial position to pay down their long-term debt from $4.5 billion in 2015 to just over $2 billion in the most recently reported quarter. This has lowered interest expense from $300 million annually to just $146 million annually, and the company is expected to continue this trend and free up more cash with every passing quarter.

Spending-less expectations are solid, too

Before we even think about what kind of demand for projects will arise from the upcoming infrastructure spending bill, the company is expected to grow sales at a modest rate while their cost cutting and debt maturing boost EPS expectations by low to mid double digits for the coming years.

After reporting $13.2 billion in sales in 2020, analysts are expecting the company to report a modest 0.8% growth to $13.34 billion in 2021, followed by a 3.7% rise to $13.8 billion in 2022 and another 3.7% rise to $14.4 billion in 2023. It’s quite evident by these figures that very little infrastructure spending expectations are baked into the current sales projections.

On the EPS side of things, the figures are much more rosy due to the company’s cost cutting measures, divestments from under-performing segments as well as debt maturities and other factors. Analysts project the company will report a 30.6% rise in EPS to $2.81 in 2021 followed by a 18% rise to $3.31 in 2022, an 18.2% rise to $3.91 in 2023 and then a 30.8% rise to $5.12 per share in 2024.

With the company’s cost cutting and other measures in place, a modest to significant boost to sales due to large amounts of spending on infrastructure improvement will undoubtedly generate a significant amount of cash for the company and allow them in return to bid and meet more contracts in the longer run and continue the cycle of growing sales and market share.

After share price rise, where do we go from here?

The real question for long-term investors looking to capitalize off the upcoming infrastructure spending bill and generally off spending increases in the United States, the EMEA region and even the Middle East where the company has a base of operations, is what kind of return should we expect given the company’s share price rise throughout the past few months and years.

AECOM is up almost 42% over the past 12 months, 30% YTD and well over 200% since the COVID-19 pandemic slump. The question now is where we go from here.

When compared to peers like MasTec, Inc. (MTZ), AECOM is trading at roughly the same earnings multiple as them, but is expected to grow earnings at a much higher rate, given that MasTec is expected to grow earnings at roughly 6% to 9% over the next 24 months. Given that both companies are trading at a price to forward earnings multiple of around 30x, their current price to earnings multiple seems appropriate for the coming years.

This means that the company is set to grow at roughly 30% annually alongside its EPS growth and has a projected fair value at 30x earnings. This presents a fair value price of $84.30 per share for 2021 and $99.30 per share for 2022, representing a share price increase potential of roughly 30% for 2021.

Add infrastructure spending to that, and…

Given the fact that some version of infrastructure spending is expected throughout the coming year and to be implemented and spent over the next 2 to 3 years, it greatly strengthens the company’s overall position and it solidifies the aforementioned valuation compared to peers and the industry as a whole.

I remain highly bullish on the company’s 36 months ahead.