Infrastructure consulting service company AECOM (NYSE:ACM) met Wall Street’s revenue expectations in Q3 CY2024, with sales up 7% year on year to $4.11 billion. Its non-GAAP profit of $1.27 per share was 1.9% above analysts’ consensus estimates.

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“We delivered strong results that reflect the strength of our strategy and our competitive advantage, including exceeding the mid-points of our previously-increased EBITDA and EPS guidance and generating record free cash flow,” said Troy Rudd, AECOM’s Chief Executive Officer.

Company Overview

Founded in 1990 when a group of engineers from five companies decided to merge, AECOM (NYSE:ACM) provides various infrastructure consulting services.

Engineering and Design Services

Companies providing engineering and design services boast ever-evolving technical expertise. Compared to their counterparts who manufacture and sell physical products, these companies can also pivot faster to more trending areas due to their smaller physical asset bases. Green energy and water conservation, for example, are current themes driving incremental demand in this space. On the other hand, those providing engineering and design services are at the whim of construction and infrastructure project volumes, which tend to be cyclical and can be impacted heavily by economic factors such as interest rates.

Sales Growth

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can have short-term success, but a top-tier one sustains growth for years. Over the last five years, AECOM grew its sales at a sluggish 3.4% compounded annual growth rate. This fell short of our benchmark for the industrials sector and is a rough starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. AECOM’s annualized revenue growth of 10.7% over the last two years is above its five-year trend, suggesting its demand recently accelerated.

AECOM also reports its backlog, or the value of its outstanding orders that have not yet been executed or delivered. AECOM’s backlog reached $23.86 billion in the latest quarter and averaged 15% year-on-year declines over the last two years. Because this number is lower than its revenue growth, we can see the company fulfilled orders at a faster rate than it added new orders to the backlog. This implies AECOM was operating efficiently but raises questions about the health of its sales pipeline.

This quarter, AECOM grew its revenue by 7% year on year, and its $4.11 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 6.3% over the next 12 months, a deceleration versus the last two years. This projection doesn't excite us and implies its products and services will see some demand headwinds.

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Operating Margin

AECOM was profitable over the last five years but held back by its large cost base. Its average operating margin of 4% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

On the plus side, AECOM’s annual operating margin rose by 2.3 percentage points over the last five years.

This quarter, AECOM generated an operating profit margin of 5.8%, up 3.7 percentage points year on year. The increase was encouraging, and since its operating margin rose more than its gross margin, we can infer it was recently more efficient with expenses such as marketing, R&D, and administrative overhead.

Earnings Per Share

We track the long-term change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

AECOM’s EPS grew at an astounding 19.4% compounded annual growth rate over the last five years, higher than its 3.4% annualized revenue growth. This tells us the company became more profitable as it expanded.

Diving into AECOM’s quality of earnings can give us a better understanding of its performance. As we mentioned earlier, AECOM’s operating margin expanded by 2.3 percentage points over the last five years. On top of that, its share count shrank by 11%. These are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business.

In Q3, AECOM reported EPS at $1.27, up from $1.01 in the same quarter last year. This print beat analysts’ estimates by 1.9%. Over the next 12 months, Wall Street expects AECOM’s full-year EPS of $4.52 to grow by 9.7%.

Key Takeaways from AECOM’s Q3 Results

It was good to see AECOM slightly beat analysts' EBITDA and EPS expectations this quarter. We were also glad its full-year EPS guidance exceeded Wall Street's estimates. Overall, this quarter had some key positives. The stock remained flat at $110.22 immediately after reporting.

Big picture, is AECOM a buy here and now? We think that the latest quarter is only one piece of the longer-term business quality puzzle. Quality, when combined with valuation, can help determine if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.