Monday, February 16, 2009

AECOM Technology (ACM) Executing Well

Continuing to work through last week's earning reports... on we move to infrastructure company AECOM Technology (ACM). We highlighted this name at the turn of the year [Jan 2: I like Zach's Idea on AECOM Technology] as a way to get a more direct exposure to our grandchildren's infrastructure money from New Deal 2.0.

A reader sent me some small water infrastructure stocks (read: Obama thesis) that are absolutely flying earlier in the week, so I am preparing a piece on those. My "mocking" of the thesis has been due to how little many of the companies investors are flocking to would actually be affected. [Dec 19: Citi Analysts Frowns on Obamamania; ABB Provides Reality Check] It is like buying General Electric (GE) for its wind business - yes you get the 0.5% of the business that is dealing with wind but you are stuck with the other 99.5% of the business.

The same goes for infrastructure - yes in a few of the names you might get SOME Obama dollars but as a % of their total business it doesn't mean much. But there is a huge irony here. 1 year ago at this time you wanted to buy internationally focused infrastructure stocks because the sexy thesis of the day was "decoupling" (foreign markets will run run run, while the U.S. will "slow" - remember, they denied there would be a recession in the U.S. a year ago - they just said we'll "slow"). So you wanted infrastructure stocks that focused on the world; and avoided the U.S..

But the irony is now you want to do the EXACT opposite... you want companies who have most of their business here because (trumpets blaring) President Elect Midas is coming.
{Zach's comment} Although large plays like the above mentioned names will likely get their share of business, I’m shying away from them in exchange for smaller companies that have the potential for much larger gains. But as a Corvette accelerates faster than an 18 wheeler on the new Obama highways, smaller project management companies will likely see more in the way of percentage increases. A company with a market cap of $300 million and annual revenue near $380 million will likely see its stock climb much more quickly than FLR with a market cap of $8.2 billion and sales of more than $20 billion.

Since that time of course New Deal 2.0 has been transformed into Pork Deal 329.0 but they decided to throw a few shards towards infrastructure for cosmetic purposes. I am not sure what exactly happened in terms of stock price but AECOM Tech took a major hit in mid January, falling from $32s to $22s in the span of 2 weeks. We will never know "why"; it could be a hedge fund exiting a position, some aggressive short tactic - etc. But at the time you just fear some bad news event is happening behind the surface; yet from the latest earnings release it seems thing are just fine. The earnings release gave a burst of life to the stock on Feb 10th, but as in 90% of the cases in this market when a stock "breakouts" you have to go against your training and not chase it - almost all these breakouts (which you traditionally want to buy) work against you in short order. And so it happened again, as the stock immediately faltered and fell back below its 50 day moving average (just under $27) - which once more displays how buying stocks even on technical analysis is not working well at all. Everything is a daytrade or couple of day trade since trends simply do not last.

One day fundamentals will matter again rather than CNBC breaking news or the "plans to save us all" hatched in D.C. so while it's mostly useless nowadays to look at company metrics I still do so for informational purposes.
  • First-quarter revenue increased to $1.5 billion, 35% higher than the first quarter of fiscal year 2008. AECOM’s gross revenue includes a significant amount of pass-through costs and, therefore, revenue, net of other direct costs, which is a non-GAAP measure, also provides a valuable perspective on its business results. AECOM’s revenue, net of other direct costs, increased 32% compared to the same period last year, to $889.5 million.
  • AECOM reported net income of $40.5 million for the first quarter, or diluted earnings per share (EPS) of 38 cents. These results represent an increase of 37% over net income of $29.5 million – and an increase of 31% over diluted EPS of 29 cents – for the same period last year.
  • Operating income for the first quarter increased 57% year over year to $69.7 million.
  • AECOM reports separate financial information for its two segments: Professional Technical Services (PTS) and Management Support Services (MSS).
  • The PTS segment delivers planning, consulting, architecture and engineering design, and program and construction management services to institutional, commercial and government clients worldwide.... a 38% increase in revenue and a 44% increase in operating income year over year.
  • The MSS segment provides program and facilities management and maintenance, training, logistics, consulting, technical assistance and systems integration services, primarily for agencies of the U.S. government.... represents a 19% increase in revenue and a 194% increase in operating income year over year.
  • We saw continued demand for our services globally throughout the infrastructure market, and this was reflected in our backlog growth during the quarter,” said Dionisio. “Projects such as our work in support of Zayed University’s new campus in Abu Dhabi, major transit expansions in San Francisco and Toronto, and five task order wins for the U.S. Air Force’s Contract Field Teams program, highlight the breadth and diversification of our success.”
With any infrastructure company comes lumpy results and we want to see a solidly growing backlog
  • AECOM announced backlog totaling $9.0 billion at December 31, 2008, a 32% increase year over year. “Our continued positive trends in margin improvement, where we saw a 107-basis-point improvement, and backlog growth, where we achieved a $2.2-billion increase in our year-over-year backlog, indicate continued solid momentum in our global end markets.”
  • Based on its results through the first quarter of the fiscal year, as well as its backlog, AECOM has reaffirmed its EPS outlook for fiscal year 2009 of $1.60 to $1.70.
So we have some very nice growth rates and even if there are some cancellations in the future, we'd turn mid 30% growth into say mid 20%+; a solid balance sheet; and 30%+ backlog growth. For all this we only see a forward PE multiple of 15 (AECOM has a year "end" of Sep 2009, not December 2009) Further, any government stimulus should help a company like this in latter 2009 and into 2010.

HAL9000 and crew, the quant hedge fund computers, seem to trade all these infrastructure plays together - if commodities are hot; they tend to go up... if not, they all stink (together) regardless of individual metrics. This is just the market we are in and HAL dominates. I can't fault anything in the results and remain constructive from a fundamental standpoint. Hopefully HAL lets us return to normal investing at some point in 2011 or so.

No position

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