AECOM Technology

AECOM posted an adjusted net loss of $64 million, or $0.50 per share, in its fiscal third quarter. The loss was driven by a $337 million pretax charge due to delays and higher projected costs on a legacy construction management project.

Why it matters: Although funding needs for two legacy construction management projects will burden Aecom's free cash flow for the next three quarters, these headwinds don't change our view of the firm's long-term profitability. The charge stemmed from a legacy construction management project that was awarded in 2019, before AECOM overhauled its risk criteria. The firm no longer pursues similar design-build public/private partnership projects. Management lowered its full-year outlook, but the adjusted EBITDA and EPS guidance remains unchanged excluding the charge, as headwinds from delayed construction management project starts and conflict in the Middle East were offset by higher expected margins.

The bottom line: We trimmed our fair value estimate for no-moat AECOM to $104 per share from $110, mostly due to our meaningfully reduced fiscal 2026 and 2027 cash flow projections. Shares are trading nearly 35% below our updated fair value estimate, which we see as an attractive entry point.

Key stats: AECOM lowered its full-year fiscal 2026 free cash flow guidance to $300 million from $400 million. Management expects an additional $500 million cash burn related to two legacy construction management projects in the first two quarters of fiscal 2027.

Long view: AECOM reiterated its long-term financial targets, aiming to grow adjusted EPS at a CAGR of at least 15% through 2029. The company grew its backlog by 13% year over year to $27.8 billion, which we expect to translate to mid-single-digit organic revenue growth through fiscal 2030. We believe that AECOM is well-positioned to capitalize on secular tailwinds across multiple end markets, including transportation, water, defense, and data centers.

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We've lowered our fair value estimate to $104 per share from $110 after the release of fiscal third-quarter results, mostly due to our meaningfully reduced fiscal 2026 and 2027 cash flow projections. For fiscal 2026, management expects adjusted earnings per share of $3.95-$4.15.

We project compound annual organic net service revenue growth of roughly 4.5% through fiscal 2030. We believe Aecom is well positioned to benefit from the $1.2 trillion infrastructure bill in the US, given its strong competitive position in the transportation, water, and environmental end markets.

We model adjusted operating margin to expand from 16.5% in fiscal 2025 to around 20% by fiscal 2029, driven by growth in the high-margin advisory business, AI-driven efficiencies, and continuous improvement. We assume an 8.2% weighted average cost of capital and a roughly 24% long-run effective tax rate in our model.

We don't believe Aecom has an economic moat. We believe that most engineering and construction firms lack moats, as intense competition, significant customer power, and the relatively standardized nature of most projects hamper economic moat creation. Furthermore, E&C firms have to contend with high cyclicality and event risk, such as legal disputes and cost overruns (which could be caused by a number of factors, including labor shortages, subcontractor performance, and inclement weather). As a result of a fragmented industry structure, high historical volatility, and the potential for large losses on individual projects, it is difficult for E&C firms to maintain consistently attractive returns on invested capital throughout the economic cycle.

Although we think that most E&C firms derive the bulk of their revenue from no-moat activities, we acknowledge that the potential for moat creation exists in certain niche sectors. Aecom has a strong reputation for its design and consulting capabilities and was ranked the number-one design firm in the United States in 2025 by Engineering News-Record magazine. The firm boasts a number of signature projects, including One World Trade Center, London’s Crossrail, and the Los Angeles Rams' SoFi Stadium. Furthermore, Aecom’s unique expertise in nuclear decommissioning makes it one of the leading competitors in the space alongside private company Bechtel. We think that Aecom’s reputation, portfolio of signature projects, and differentiation in certain niche markets could ultimately help the company forge an economic moat based on intangible assets in the more specialized parts of its business.

Nonetheless, despite some moat creation potential in certain niches, we view most of the design and construction work that E&C firms engage in as relatively routine. Industry cyclicality has historically driven relatively volatile returns on invested capital, and we do not expect that to change. We forecast Aecom to earn average returns on invested capital roughly in line with its cost of capital throughout the business cycle. As a result, we believe that Aecom lacks an economic moat.

Thanks to its diversified portfolio, we expect Aecom to take advantage of growth opportunities in sectors with favorable long-term prospects, including transportation and water.

Aecom's strong cash flows have allowed the firm to repurchase over 17% of its shares outstanding since September 2020.

Aecom has significantly improved its margins in recent years, and we see room for further upside driven by growth in the high-margin advisory business and efficiencies driven by artificial intelligence.

Aecom's international business is not as profitable as its Americas segment: The former's adjusted operating margin is in the low teens, whereas the latter generates high-teens operating margin.

Declines in government spending could have a significant impact on the firm’s earnings.

The 2014 URS acquisition failed to generate expected synergies despite over $600 million in integration and restructuring costs.