Analyzing David Einhorn's Top Holdings: Aecom Technology

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Mar 20, 2015
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David Einhorn (Trades, Portfolio) is President of Greenlight Capital - a value-oriented investment advisor. He believes an investment approach emphasizing intrinsic value will achieve consistent absolute investment returns and safeguard capital regardless of market conditions. He is a noted activist investor, taking positions in companies, and then pushing management to implement changes.

Aecom Technology (ACM, Financial) is one of his top ten holdings. Last quarter, he used a decline in Aecom's stock price as an opportunity to ramp up his position in the company. As of December 31, 2014 he was holding over 6.65 million shares in the company. The following chart shows his holding history in the company.

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Aecom is an interesting stock. The company provides architectural design and construction services to its clients globally. In July, 2014 the company announced merger agreement with URS Corporation making it the largest combination in sector's history. Management expected an annual synergy cost savings of over $250 million from this combination. In addition, URS acquisition brought complementary skills and geographic exposure which was likely to help the company cross-sell its services.

The stock reacted positively to this merger and was trading in high 30s in September last year. However, crash in crude oil prices in late 2014 caused the stock price to correct meaningfully.

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Spending by Middle-Eastern Governments had been a key driver for Aecom's revenues in the recent years. It appears that investors are worried that correction in oil prices will cause Middle-Eastern Governments to cut their budgets adversely impacting Aecom's revenue.

This is not in sync with the ground realities. There has been no cut in spending by Middle-Eastern governments. Recently, Saudi Arabian Government announced a $229 billion budget that reflected an increase over 2014 spending. The company's prospects in the region remains bright and its ongoing projects are on-track.

Back home, the private sector remains strong in the US and the company is executing a number of major infrastructure projects. Later cycle state and local clients are benefiting from improved tax receipts and incremental funding from recent infrastructure bonds. The backdrop of Federal market is also better. The passage of the Omnibus bill in December along with the recently released budget request for fiscal 2016 demonstrate a high level support to the federal clients that Aecom serves. The President's 2016 budget put forth a six year $478 billion highway and transit plan which is an 11% improvement from prior levels. The company currently have more than $5 billion of bids being evaluated by its national government clients, along with $3 billion of active pursuits which will help its backlog going forward.

Aecom is trading at 10.8 times its FY2015 EPS. According to sell-side analysts, its EPS is expected to grow 23% in the current year and 13% next year. Out of ten analysts covering the company five have 'buy' ratings and five have 'hold' ratings. I believe the stock is a bargain at current levels given its improving fundamentals, merger synergies with URS, high projected EPS growth and low valuation.