AECOM reported solid operational results in fiscal second quarter 2014, and awards were well above our forecast driven by strength in construction services and Asian and Middle Eastern markets. However, we continue to have a cautious view regarding organic revenue growth despite the 10% sequential backlog increase recorded in the quarter, as backlog increasingly consists of larger projects that take longer to complete and includes greater amounts of pass-through revenue (compared with AECOM’s historical backlog mix), in our view, because of an increasing focus on construction.

We have always viewed AECOM’s global diversity positively, but currently with key markets such as the Americas design business and Australia continuing to face headwinds, we believe achieving consolidated organic revenue growth will be difficult until these markets once again experience more consistent backlog conversion and complement growth in developing economies.

Regarding cash flow, AECOM’s quarterly free cash flow was weak as expected at -$44 million because of the timing of construction-related payments, but the company reaffirmed its expectation that free cash flow will approximate net income in fiscal year 2014 and stay on track to meet its long-term target of $1.3 billion to $1.8 billion in cumulative free cash flow by the end of fiscal year 2017 (cumulative free cash flow thus far totals $429 million). With shares appreciating 16% since fiscal first quarter 2014 results due to expectations of recovery in U.S. nonresidential markets (which AECOM is seeing only in certain regions), we maintain our Market Perform rating as weak organic growth limits upside to earnings forecasts and catalysts to drive further valuation multiple expansion are limited in our view. We modestly lowered our fiscal 2014 EPS estimate to $2.53 from $2.55 previously and maintained our fiscal 2015 EPS at $2.75.

In addition, we raised our 12-month price target to $30 from $28 as we move our valuation to reflect our fiscal 2015 EPS estimate. Full-year EPS outlook tempered because of sluggish Americas design and Australia businesses. Following fiscal second quarter 2014 results, AECOM now expects its fullyear EPS to be near the low end of its $2.50 to $2.60 guidance range because of continuing sluggish conditions in its Americas design and Australia businesses, which collectively will result in slightly lower net service revenue, partly offset by an improvement in consolidated EBITDA margin. The Americas design business continues to be affected by the slow conversion of prospective and booked projects to execution while the Australia business nears completion of its restructuring efforts and repositioning of personnel to target a larger number of infrastructure opportunities (in light of few nearterm mining prospects).

Our slightly lower fiscal year 2014 EPS estimate of $2.53 (compared with $2.55 previously) embeds an expectation of a 4% consolidated decrease in net services revenue along with a 10-basis-point expansion in EBITDA margin to 9.5%, though better-than-anticipated cost controls could provide modest upside to our forecast earnings. We maintain our fiscal year 2015 EPS estimate of $2.75 and anticipate lowsingle- digit growth and margin expansion in both of AECOM’s businesses next fiscal year. Our fiscal year 2015 estimate does not embed any share repurchases, which currently remain AECOM’s top priority for free cash flow despite the company’s pause in repurchase activity in fiscal second quarter 2014 (since beginning its repurchase program in fiscal fourth quarter 2011, AECOM has repurchased $682 million of shares, lowering its share count by nearly 20%). May 06, 2014 Stock Rating: Market Perform Company Profile: Core Growth Price Target: $30.00 Symbol: ACM (NYSE) Price: $32.08 (52-Wk.: $27-$35) Market Value (mil.): $3,197 Fiscal Year End: September Long-Term EPS Growth Rate: 17% Dividend/Yield: None 2013A 2014E 2015E Estimates EPS FY $2.35 $2.53 $2.75 CY Sales (mil.) 4,977 4,778 4,984 Valuation FY P/E 13.7x 12.7x 11.7x CY P/E NA NA Trading Data (FactSet) Shares Outstanding (mil.) 96 Float (mil.) 78 Average Daily Volume 615,399 Financial Data (FactSet) Long-Term Debt/Total Capital (MRQ) 0.0 Book Value Per Share (MRQ) 21.3 Return on Equity (TTM) 11.4 Two-Year Price Performance Chart Sources: FactSet, William Blair & Company estimates 12/31/12 12/31/13 $0 $5 $10 $15 $20 $25 $30 $35 AECOM Technology Corporation is a global provider of professional technical and management

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