Here's a riddle for you: When is news that a company has won $132.5 million in government contracts "no big deal?" Unfortunately, the answer seems to be: "When the winner of those contracts is AECOM ."
When terrorists knocked down the World Trade Center, AECOM stepped up to help build it back up again. Image source: AECOM.
The newsOn Tuesday, the Pentagon's daily digest of contracts awarded contained what really appeared to be good news for AECOM. In one contract, AECOM won over other bidders outright, claiming a $10 million deal to provide "architectural and engineering services to support the Army Medical Command within the South Atlantic Division of the Army Corps of Engineers."
In a separate, bigger award, AECOM led a field of four companies, including rival Booz Allen Hamilton and two smaller, privately held firms, included in a $122.5 million contract "to support the National Defense Center for Environmental Excellence" in areas including "environmental, safety, occupational health and energy."
The reactionAdd them up, and that's up to $132.5 million in new business AECOM could win (it must now bid against its co-winners for individual task orders under the NDCEE award). But what was the market's response to the news? On Wednesday, the first trading day after the contracts were announced, AECOM stock is down more than 1%.
To figure that out, you need to put the new business in context. While it's hardly a household name, AECOM is simply a huge company, boasting a $4.6 billion market capitalization and doing more than $18 billion in business annually (including work on one construction project you may have heard of. See photo above). Thus, even if AECOM ends up claiming every revenue dollar up for grabs from that NDCEE contract, Tuesday's wins will amount to less than 1% of the business AECOM already does in an ordinary year.
And even if AECOM takes the whole pie, it will make virtually no profit from it. According to data from S&P Global Market Intelligence, AECOM currently generates just 3% gross margins from its business, and hasn't broken out of the single digits on gross margin any time in the last 10 years. The company's operating profit margin is an even weaker 2.4%, and its net profit margin -- what AECOM earns on the bottom line -- is currently negative. Viewed in the worst possible light, therefore, if things keep going as they currently are, the more business AECOM wins... the more money it loses!
Look deeperAnd yet, while that's certainly one way to look at AECOM's numbers, focusing on GAAP profitability isn't necessarily the best way to view the company. Look closely at the company's cash flow statement, and you'll see that while "GAAP unprofitable" today, AECOM is in fact producing sizable amounts of cash profit -- free cash flow -- from its business.
Last year, AECOM generated roughly $515 million in free cash flow on $18.1 billion in revenues. That still works out to only a 2.8% free cash flow margin -- but it's a heck of a lot better than the 0.2% negative net margin reflected on the company's income statement.
Priced today at roughly 9 times free cash flow, and projected to grow its business at nearly 8% annually over the next five years, I won't say AECOM stock is a bargain today -- but it's at least not quite as expensive as it looks.
The article AECOM Wins $132.5 Million in New Government Business, Market Yawns originally appeared on Fool.com.
Fool contributorRich Smithdoes not own shares of, nor is he short, any company named above. You can find him onMotley Fool CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 315 out of more than 75,000 rated members.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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