AECOM

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

AECOM is a global infrastructure consulting firm, primarily focused on providing professional, construction and management services to governments and private clients.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

AECOM is a global infrastructure consulting firm, offering services in design, planning, construction, and management.

Business Overview

AECOM’s revenue is broadly divided into two major segments:

  • Americas (AMRS): This segment focuses on projects within the United States, Canada, and Latin America. It encompasses a wide array of services including transportation, facilities, and environmental design and consulting.
  • International: This segment comprises revenue primarily from Europe, the Middle East, India, Africa, and the Asia-Pacific region. Similar to Americas, the services cover diverse infrastructure projects, emphasizing international reach and expertise.

AECOM is a global player in the infrastructure services industry, with a particular focus on providing consulting, engineering, design and management services for various types of projects.

AECOM’s offerings are diversified, which makes it resilient, but also harder to understand completely. The company generates revenue via a range of government and private contracts, including:

  • Transportation: design, planning, and construction management of transportation infrastructure such as rail, light rail, highways, and airports.

  • Facilities: design and building services for facilities such as government buildings, educational campuses, healthcare, and data centers.

  • Environment: environmental management, restoration, and consulting services.

  • Energy: providing a variety of services in the renewable, power, and gas sectors.

The competitive landscape in the infrastructure services industry is intense and highly fragmented. While there are very few global players who have scale and broad expertise, they still face intense competition from smaller, more localized companies. This often leads to price-based competition on contracts. This creates a low barrier to entry but a high barrier for any company to become a global and truly profitable player.

Although AECOM has diversified revenue, there are not clear trends on any increasing moat or a high barrier of entry. The industry still remains fragmented.

Financial Analysis

Revenue and Profitability: ACM’s reported a revenue of $14.4 billion in the year ended September 2022 and $3.5 billion in the first three months ending Dec 31st 2022. However, most of this is not organic revenue because almost all of the growth comes from recent acquisitions.

  • The reported net income was $367 million in the year ended September 30th 2022 and a net income of $101.5 million in the first quarter of 2023. It is important to point out that these earnings are greatly impacted by restructuring costs and goodwill amortization, making their reported results very difficult to analyze accurately.
  • As you can see, profitability can be unstable, making valuation harder.
  • The gross margin for the first quarter of 2023 is 10.8% on revenue compared to 10.7% in the same period in the previous year.
  • The cost of revenue increased from $12.5 billion in fiscal year 2021 to $13.4 billion in fiscal year 2022.
  • The company recorded $284.6 million in restructuring and other related expenses in fiscal year 2022.
  • The company’s interest expense has increased from $259.1 million in 2021 to $329 million in 2022 due to increasing interest rates and borrowing, and this is a risk.

AECOM’s financials are messy to analyze due to the company’s frequent acquisitions, restructuring costs, and goodwill amortization. A high debt load, and thus interest costs, are significant risks.

Balance Sheet:

  • The company’s current assets were $5.4 billion and total assets were $11.7 billion as of September 30th 2022.
  • Their cash and equivalents on hand are approximately $1 billion.
  • The Company’s total liabilities totaled approximately $9.3 billion
  • The company had a debt to equity ratio of ~1.5, which is a fairly high amount of debt compared to its equity.
  • Total stockholders’ equity was $2.4 billion
  • The company’s debt stands at 3.4 billion

While the company has a reasonable amount of assets, it also has a significant level of debt. A high debt level is risky and makes the company more vulnerable to macroeconomic risks, as shown by its interest rates.

Moat Analysis

Moat Rating: 2/5

AECOM has a relatively limited economic moat. Here’s a detailed breakdown:

  • Intangible Assets: The company leverages its brand recognition, expertise, and reputation as a global leader in infrastructure services. But given that the barrier to entry into this market is not high, these benefits can quickly diminish if they fail to meet expectations. However, their deep relationships with many governments is also a positive.
  • Switching Costs: Switching costs are not high within the industry. It’s relatively easy for the customer to select a different company for their project. However, for government contracts they can have an advantage in winning renewals due to their past relationships.
  • Network Effect: There is a slight degree of network effects, in that a company’s ability to fulfill projects on time and on budget builds its reputation. These can help win future bids and contracts. However, these effects are not that strong and it is difficult to see this as a long term moat that is truly defensible.
  • Cost Advantages: AECOM is a large company but does not have any significant cost advantages that are structurally defensible. As a result, it does not have a significant moat on the cost front.

Overall, the competitive advantage is quite limited, with some weak advantages. A 2 out of 5 rating is justified due to the weak or relatively weak moats.

Risks to the Moat

AECOM faces several potential risks that could erode their existing moat and threaten financial stability, including:

  • Economic Cyclicality: Government spending on infrastructure and private investments in the sector are influenced by larger economic conditions. If the economy slows down, funding for AECOM’s type of contracts would most likely dry up and affect its ability to make a profit.
  • Intense Competition: The fragmented industry is highly competitive. Small local firms are able to often compete on price, thereby eroding margins for larger players such as AECOM, and creating a high-competition environment for future bids.
  • High Leverage: Given its high debt load, an increase in interest rates or credit costs could harm its profitability and even make the debt unmanageable.
  • Project Failures/Cost Overruns: Large scale projects are complex, and many things could go wrong with them (cost overruns, delays, lack of resources etc.). This would lead to a loss of reputation and money for the company.
  • Accounting Practices: The way AECOM accounts for goodwill and other related items, as well as having high non-operating losses can hide the true picture of the business and cause for concern.

Given its high debt load and exposure to economic cyclicality, this is not a defensive stock, and the moat is vulnerable to outside factors.

Understandability Rating

Understandability: 4/5 Although the company has several different areas of operations, it is relatively easy to understand what it does. However, the company’s financials can be difficult to grasp at first glance.

Balance Sheet Health Rating

Balance Sheet Health: 3/5 While not in a terrible situation, the company’s balance sheet does raise some concerns. They have a high debt to equity ratio, and high long term debt. This would make them vulnerable in a recession or if interest rates continue to rise. Their liquidity is good, as they have a fairly good amount of cash on hand. Overall, with the liabilities still quite high and more clarity on the company’s overall operations is needed.