Richard Pzena (Trades, Portfolio) is founder and co-chief investment officer of Pzena Investment Management, LLC, with more than $24 billion under management. Pzena's philosophy is based on ranking companies from the cheapest to the most expensive on the basis of current share price to normal long-term earnings power. He purchases shares in good businesses that are selling at a low price. He understands that it is often unrealistic to expect such opportunities to be available absent some sort of problem which causes the price of the shares to drop. The question Pzena and his team try to answer is whether the issue that caused the drop in price is temporary or permanent.
Last quarter, Mr. Pzena increased his stake in Aecom Technology (ACM, Financial) by buying 763,639 shares. As of March 31, 2015, he was holding 2,819,465 shares of the company. He has been adding up more shares to his stake in the company for last several quarters. The following chart shows his holding history in the company.
Aecom provides architectural design and construction services to its clients globally. In July 2014 the company announced a merger agreement with URS Corporation making it the largest combination in the sector's history. Management expected an annual synergy cost savings of over $250 million from this combination. For 2015, management’s target is to realize $110 million in synergy cost savings. In addition to synergy cost savings, 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 the high 30s in September last year. However, the crash in crude oil prices in late 2014 caused the stock price to correct meaningfully. 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, the 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.
Last quarter, the company delivered double-digit growth in Middle Eastern markets. Its clients are making investments in critical infrastructure to keep pace with population and urbanization trends. These clients have substantial financial resources to mitigate their declining oil revenue and the company’s backlog also provides it with a good amount of visibility. While there are some chances that the company’s growth in this market may moderate, it is very unlikely to see any decline in revenues any time soon.
Back home, the private sector remains strong in the U.S., 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 11 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 10 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.
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