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Is AECOM a Better Engineering R&D Services Pick Than Fluor?

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·5-min read
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President Biden is on board with a new 'Bipartisan Infrastructure Framework' to build roads, bridges and more. The package — which totals $579 billion in new spending over the next five years — addresses physical infrastructure, including upgrade of the power grid, public transportation such ascharging stations for electric vehicles, high-speed internet access in rural areas and replacing lead water pipes.

Here comes the opportunities of construction companies to lay a solid foundation for growth.

Solid construction activities in the public sector, low interest/mortgage rates, an improving job market and solid GDP numbers have helped the Zacks Construction sector to gain 43.7% over the past year, outperforming the broader market’s (S&P 500) 37.5% rally. Given this backdrop, construction stocks could offer a safe haven to investors because of their stability and the fact that these are fundamentally strong enough to withstand industry woes.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Here, we focus on two companies from the Zacks Engineering - R&D Services industry falling under the broader Construction space — AECOM ACM and Fluor Corporation FLR. At present, market capitalization of AECOM is $8.99 billion, while that of Fluor stands at $2.26 billion. Both AECOM and Fluor currently carry a Zacks Rank #3 (Hold). The Zacks Engineering – R&D Services industry currently carries a Zacks Industry Rank #86, which places it at the top 19% of more than 250 Zacks industries. Favorable infrastructure spending has been driving the performance of engineering, procurement and construction service providers from the Construction space. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Before drawing a head-to-head comparison between ACM and FLR, let’s check out a few key statistics of the companies.

What Defines the Construction Players

AECOM is a leading solutions provider for supporting professional, technical and management solutions for diverse industries across end markets. The company has been continuously focusing on delivering industry-leading margins and unlocking capital to invest in growth as well as innovation. Also, focus on higher-margin and lower-risk Professional Services businesses bodes well. Its solid backlog level of $39.4 billion at fiscal second quarter-end indicates significant opportunities in the forthcoming quarters.

Fluor provides engineering, procurement, construction and maintenance services through a number of subsidiaries. The company has a solid backlog level of $23.8 billion (as of first-quarter end), which is a key indicator of future revenue growth. Fluor has been focusing on a new strategy, “Building a Better Future,” within which it has outlined four strategic priorities for driving shareholders’ value. It has been refining its approach toward the infrastructure business and will no longer pursue large-scale projects for clients where there is a history of onerous contractual terms and inadequate program management.

Stock Performance

AECOM and Fluor have gained 63.9% and 27.8%, respectively, over the past year. The Engineering – R&D Services industry has collectively gained 80.7% during the period. Although both the stocks have underperformed the industry, AECOM fared much better than Fluor in this parameter.

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

Earnings Growth Rate & Surprises

The ability to consistently boost profit levels defying industry woes is a defining characteristic of the best companies. Analysts expect AECOM’s earnings to grow 29.3% in the current year. Comparatively, Fluor’s earnings are expected to grow 129.7% over the same time frame. Hence, Fluor’s higher growth rate implies greater potential for capital appreciation.

Meanwhile, considering a more comprehensive earnings history, AECOM surpassed estimates in all the last four quarters, with an average of 9.9%. That said, Fluor missed analysts’ expectations in three of the last four quarters.

Valuation

The industry is clearly undervalued than the S&P 500, with respect to forward 12-month price-to-earnings (P/E) ratio. This implies that the industry has upside potential for the near future. The industry has an average forward 12-month P/E ratio — which is the best multiple for valuing Engineering - R&D Services stocks — of 20.8, which is below the S&P 500’s average of 22.2. Hence, it might be a good idea to focus on stocks belonging to this particular industry.

Coming to the two stocks under consideration, AECOM and Fluor — with a 12-month forward P/E ratio of 19.3 and 16.3, respectively — are undervalued than the S&P 500 and the industry.

Comparing the two stocks, Fluor is less pricey than AECOM.

Profitability and Returns

Profitability and returns are a measure of the quality of a company’s business and growth opportunities. Return on Capital (ROC) of AECOM is 7.1%, while that of Fluor is negative 3.7%. The industry has a ROC of 5.1%. This signifies that AECOM’s business generates a higher return on investment than Fluor’s.

Return on Equity (ROE) is a measure of a company’s efficiency in utilizing shareholders’ funds. ROE in the trailing 12 months for AECOM is 11.5%. Fluor’s trailing 12-month ROE is negative 8.6%. While AECOM has outpaced the industry level of 9.4%, Fluor has failed to surpass the same in the said period.

Bottom Line

AECOM appears to be a comparatively better investment option than Fluor in terms of share price performance, earnings surprise history, ROE and ROC. However, Fluor holds an advantage when it comes to earnings growth rate for the current year and valuation.

Biden administration’s endeavor to spend money into rebuilding the nation's roads, bridges, and other infrastructure would give construction companies like AEOM, Fluor, United Rentals, Inc. URI, Quanta Services, Inc. PWR and others a solid foundation for growth.


Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Quanta Services, Inc. (PWR) : Free Stock Analysis Report

Fluor Corporation (FLR) : Free Stock Analysis Report

AECOM (ACM) : Free Stock Analysis Report

United Rentals, Inc. (URI) : Free Stock Analysis Report

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