3 Reasons to Avoid ACM and 1 Stock to Buy Instead

Since November 2024, AECOM has been in a holding pattern, posting a small return of 0.9% while floating around $109.77.

Is there a buying opportunity in AECOM, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is AECOM Not Exciting?

We're sitting this one out for now. Here are three reasons why you should be careful with ACM and a stock we'd rather own.

1. Backlog Declines as Orders Drop

Investors interested in Engineering and Design Services companies should track backlog in addition to reported revenue. This metric shows the value of outstanding orders that have not yet been executed or delivered, giving visibility into AECOM’s future revenue streams.

AECOM’s backlog came in at $24.27 billion in the latest quarter, and it averaged 1.6% year-on-year declines over the last two years. This performance was underwhelming and shows the company is not winning new orders. It also suggests there may be increasing competition or market saturation.

2. Low Gross Margin Reveals Weak Structural Profitability

Gross profit margin is a critical metric to track because it sheds light on its pricing power, complexity of products, and ability to procure raw materials, equipment, and labor.

AECOM has bad unit economics for an industrials business, signaling it operates in a competitive market. As you can see below, it averaged a 6.4% gross margin over the last five years. Said differently, AECOM had to pay a chunky $93.55 to its suppliers for every $100 in revenue.

3. Weak Operating Margin Could Cause Trouble

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

AECOM was profitable over the last five years but held back by its large cost base. Its average operating margin of 4.3% was weak for an industrials business. This result isn’t too surprising given its low gross margin as a starting point.

Final Judgment

AECOM isn’t a terrible business, but it isn’t one of our picks. That said, the stock currently trades at 21.3× forward P/E (or $109.77 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're pretty confident there are superior stocks to buy right now. We’d suggest looking at a top digital advertising platform riding the creator economy.

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