Construction Stocks

Aecom Analysis – Initial Coverage $ACM

AECOM_logoBenjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – July 2015.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Aecom (ACM) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): AECOM is a provider of professional technical and management support services for commercial and government clients around the world. The Company provides planning, consulting, architectural and engineering design, and program and construction management services for a range of projects, including highways, airports, bridges, mass transit systems, government and commercial buildings, water and wastewater facilities, and power transmission and distribution. The Company also provides program and facilities management and maintenance, training, logistics, security and other support services, primarily for agencies of the United States government. It operates in two segments: Professional Technical Services and Management Support Services. Effective July 10, 2014, it acquired ACE International Consultants SL, a Madrid-based provider of consulting services. In July 2014, it acquired Hunt Construction Group, adding to AECOM’s construction services business.

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Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7

  1. Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
  2. Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
  3. Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
  4. Dividend Record – has paid a dividend for at least 10 straight years – FAIL
  5. Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
  6. Moderate PEmg ratio – PEmg is less than 20 – FAIL
  7. Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – PASS

Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 0/5

  1. Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
  2. Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
  3. Earnings Stability – positive earnings per share for at least 5 years – FAIL
  4. Dividend Record – currently pays a dividend – FAIL
  5. Earnings growth – EPSmg greater than 5 years ago – FAIL

Valuation Summary

Key Data:

Recent Price $30.90
MG Value $2.67
MG Opinion Overvalued
Value Based on 3% Growth $21.76
Value Based on 0% Growth $12.76
Market Implied Growth Rate 6.05%
Net Current Asset Value (NCAV) -$30.11
PEmg 20.59
Current Ratio 1.34
PB Ratio 1.38

Balance Sheet – March 2015

Current Assets $5,985,000,000
Current Liabilities $4,461,000,000
Total Debt $4,692,000,000
Total Assets $14,016,000,000
Intangible Assets $6,520,000,000
Total Liabilities $10,586,000,000
Outstanding Shares 152,800,000

Earnings Per Share

2015 (estimate) $0.97
2014 $2.33
2013 $2.35
2012 -$0.52
2011 $2.33
2010 $2.05
2009 $1.73
2008 $1.41
2007 $1.15
2006 $0.74
2005 $1.68

Earnings Per Share – ModernGraham

2015 (estimate) $1.50
2014 $1.75
2013 $1.50
2012 $1.18
2011 $1.93
2010 $1.63

Dividend History
Aecom does not pay a dividend.

Free Cash Flow

Conclusion:

Aecom does not qualify for either the Defensive Investor or the Enterprising Investor.  The Defensive Investor is concerned with the low current ratio, insufficient earnings stability over the last ten years, lack of dividends, and the high PEmg ratio.  The Enterprising Investor is concerned by the level of debt relative to the current assets, the lack of dividends, and the insufficient earnings growth or stability over the last five years.  As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a speculative attitude.  As for a valuation, the company appears to be overvalued after seeing its EPSmg (normalized earnings) decline from $1.93 in 2011 to an estimated $1.50 for 2015.  This level of earnings growth does not support the market’s implied estimate of 6.05% annual earnings decrease over the next 7-10 years, and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value below the price.

The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects.  What do you think?  What value would you put on Aecom (ACM)?  Where do you see the company going in the future?  Is there a company you like better?  Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.

Disclaimer:  The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.

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