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Here's Why You Should Hold on to AECOM (ACM) Stock for Now

Increased infrastructural spending, solid backlog, focus on ESG-related services, digital efforts, and higher ROE are set to drive growth for AECOM (ACM) amid labor constraints and certain end-market challenges.

This story originally appeared on Zacks

AECOM ACM has been making the most from strength across core transportation, water, and environment markets as well as solid backlog. Furthermore, its focus on Environmental, Social and Governance or ESG-related services and digital initiatives are encouraging.

Shares of this supporting professional, technical and management solutions provider have climbed 47.4% year to date, faring better than the industry’s 29.1% rally. The price performance was backed by an impressive earnings surprise history. Shares have also outperformed the broader construction sector’s 25.5% rise. The company surpassed earnings estimates in five of the trailing six quarters. The trend is expected to continue in the near term, courtesy of its solid performance in fiscal 2021 despite disruptions caused by the COVID-19 outbreak.

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Yet, coronavirus-related headwinds and labor constraints are concerns for AECOM. Let’s delve deeper into the factors that justify its current Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Growth Drivers

Strength Across Core Transportation, Water & Environment Markets

ECOM is expected to have gained from strength across core transportation, water and environment markets in the fiscal fourth quarter. The company’s net service revenues or NSR — defined as revenues excluding subcontractor and other direct costs — have been benefiting from the same, especially in the design business.

AECOM’s NSR for fourth-quarter fiscal 2021 increased 6.5%, marking the third consecutive quarter of accelerating organic growth including strong contributions from both Americas and International businesses. Overall, the company’s performance demonstrates that it has been outgrowing the industry organically and capturing market share.

Solid Backlog & Higher Infrastructural Spending

Its backlog amounted to $38.6 billion at fiscal 2021-end. The backlog level included 18% contracted backlog growth, with improvement in both Design and Construction Management businesses. AECOM currently has good visibility of strong backlog and pipelines for the upcoming quarters. The company’s solid backlog levels, which are a key indicator of future revenue growth, indicate significant opportunities in the forthcoming quarters. AECOM’s pipeline of opportunities increased in double digits in the Americas design business.

Additionally, in the United States, the $1.2-trillion Infrastructure and Jobs Act marks a generational investment in America's infrastructure. This bill provides the much-needed long-term funding certainty across the company’s strongest end markets such as transit modernization, electrification, environmental remediation and climate resilience.

Digital Push

During fourth-quarter fiscal 2021, the company witnessed an increase in operating margin, primarily due to reduced costs and a simplified operating structure resulting from restructuring activities in the previous quarters. This improved profitability is enabling accelerated investments in organic growth and expanded digital capabilities through Digital AECOM, its digital brand that includes a portfolio of products to more holistically serve clients on their digital transformations, which will be a key contributor toward achieving 17% longer-term margin target.

Superior ROE

AECOM’s superior return on equity (ROE) is also indicative of growth potential. The company’s ROE currently stands at 14.6%. This compares favorably with ROE of 6.8% for the industry it belongs to. This indicates efficiency in using its shareholders’ funds and AECOM’s ability to generate profit with minimum capital usage.

Some Better-Ranked Stocks From the Broader Construction Sector

Beazer Homes USA, Inc. BZH currently sports a Zacks Rank #1. This Atlanta-based homebuilder continues to gain from strong operational execution and continued strength in the housing market.

Beazer Homes has gained 38.5% year to date (YTD). Earnings are expected to grow 23.7% in fiscal 2022.

Meritage Homes Corporation MTH currently sports a Zacks Rank #1. Based in Scottsdale, AZ, Meritage Homes is one of the leading designers and builders of single-family homes. Its focus on entry-level LiVE.NOW homes has been a major driving factor.

Meritage Homes has gained 35.7% YTD. Earnings are expected to grow 74.4% in 2021 and 22.2% in the next.

Altair Engineering Inc. ALTR currently carries a Zacks Rank #2 (Buy). Based in Troy, MI, this company a global technology company provides software and cloud solutions in the areas of simulation, high-performance computing, data analytics and artificial intelligence.

Altair Engineering shares have gained 24% YTD. Earnings are expected to grow 12.3% in 2022.

5 Stocks Set to Double

Each was handpicked by a Zacks expert as the #1 favorite stock to gain +100% or more in 2021. Previous recommendations have soared +143.0%, +175.9%, +498.3% and +673.0%.

Most of the stocks in this report are flying under Wall Street radar, which provides a great opportunity to get in on the ground floor.

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