Why Aecom Group Earnings Made the Stock Drop
Key Points
Aecom was supposed to report a profit last night.
It reported a loss instead.
A 7-year-old contract was to blame.
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Engineering firm Aecom (NYSE: ACM) stock tumbled 5.5% through 10:25 a.m. ET Tuesday after missing badly on earnings last night.
Heading into the report, analysts forecast Aecom would earn $1.51 per share in its fiscal Q3 2026. Instead, Aecom reported a $0.50 per share loss. Crazily, this came in a quarter when Aecom's revenue -- $3.6 billion -- was 80% more than the $2 billion Wall Street expected!
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Aecom Q3 earnings
Even $3.6 billion represented a 14% decline in revenue for Aecom year over year. Worse, the work Aecom did was unprofitable. Operating earnings ran negative, non-GAAP earnings were the $0.50 loss noted above, and GAAP results showed an even bigger net loss: $0.65 per share.
Even the good news at Aecom was kind of bad. Aecom generated positive free cash flow of $55 million in the quarter. However, this was 79% less free cash flow than the company generated a year ago.
What this means for Aecom stock
Aecom management blamed these results on "a $337 million pre-tax charge resulting from a higher projected cost to complete a Construction Management project."
Now, the good news is that the charge related to a contract signed in 2019 "under terms and conditions that would not be acceptable after the substantial changes the Company implemented to its risk policies several years ago." So it's not likely to repeat. The bad news is the damage is done -- and it was bad enough to turn what should have been a profitable quarter into a loss.
Going forward, management will try to recover from that seven-year-old mistake, and thinks $300 million in free cash flow this year is achievable. That still values the stock at a rich 32x price-to-free cash flow ratio, though.
For now, Aecom stock looks expensive to me.
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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Aecom. The Motley Fool has a disclosure policy.
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