ABM Industries: Cleaning Up by Cleaning Up

Jan.15.10 | About: ABM Industries (ABM)

ABM Industries (NYSE:ABM) is the largest contractual facilities servicer in America for industrial and commercial properties. About 5% of total revenues come from Canadian operations. The company provides janitorial services (including floor cleaning and finishing, wall and window washing, and other cleaning services) parking, engineering, and security to hundreds of properties throughout North America. They also market janitorial supplies and equipment.

The type of services ABM provides are not particularly economically sensitive nor are they readily deferrable. This has shown to be true over many years. Fiscal 2009 (ended Oct. 31, 2009) marked the fourteenth year of the past sixteen that saw higher year-over-year EPS.
Earnings, cash flow, book value and dividends each hit all-time highs in the FY just completed. Here are ABM’s per share numbers from continuing operations as reported by Value Line:

FY
Sales
C/F
EPS
Div.
B/V
Avg. P/E
2001
39.98
1.46
0.90
0.33
7.40
17.6x
2002
43.49
1.23
0.92
0.36
7.67
17.6x
2003
46.78
1.06
0.73
0.38
9.18
20.4x
2004
49.61
1.13
0.84
0.40
9.08
21.7x
2005
52.73
1.33
0.91
0.42
8.70
21.4x
2006
55.78
1.42
0.97
0.44
11.13
19.1x
2007
58.35
1.40
0.99
0.48
12.46
24.7x
2008
71.10
1.66
1.10
0.50
12.64
19.3x
2009
67.10
2.00
1.33
0.52
13.20
13.6x
Click to enlarge
Consensus views for FY 2010 and 2011 are now at $1.42 and $1.59 /share. At this afternoon’s price of $20.30 that puts the multiple at just 14.3x this year’s and about 12.8x next year’s expectations. Those are bargain levels compared to all of ABM’s trading history prior to the late 2008 – early 2009 market meltdown. Value Line notes ABM’s 10-year median P/E has been 19x and is using that same multiple in calculating their 3-5 year projections.
The current yield of 2.75% is also attractive in today’s interest rate environment and it’s higher than typical for ABM while well covered at about 39% of net earnings. The dividend has been increased in each of the past 15 years. It now stands at $0.14 /share quarterly.
Total debt is < 20% of capital. They have no defined benefit plan (and no pension liabilities). Value Line rates their ‘earnings predictability’ in the 90th percentile (with 100th being best) and sees ‘stock price stability’ in the 75th percentile.
Officers and directors have shown confidence through their ownership of about 12.7% of the outstanding shares. As the leader in its field ABM is well positioned to gain market share. They picked up a long-term contract to maintain the Staples Center (home of the LA Lakers) last year.
A conservative 12-month target price might be 16x the 2010 calendar year estimate of about $1.46 /share. That would bring ABM back to about $23.36 or 15% above the current quote. Add in the 2.56% dividend and you’ve got a nice total return for a pretty low-risk stock. That goal might turn out to be too timid based on ABM’s past trading history. ABM actually changed hands as high as $24, $31.20, and $27.50 during 2006-2007-and 2008 when sales, dividends and earnings were all well below today’s levels.
Those who are comfortable with option trading might want to consider this six-month buy/write combination:
Cash Outlay
Cash Inflow
Buy 1000 ABM @$20.30 /share
$20,300
Sell 10 July $22.50 Calls @ $1.05 /share
$1,050
Sell 10 July $22.50 Puts @ $3.40
$3,400
Net Cash Out-of-Pocket
$15,850
Click to enlarge
If ABM shares climb to $22.50 (+11%) or better by July 16, 2010:
· The $22.50 calls will be exercised.
· You will sell your shares for $22,500.
· The $22.50 puts will expire worthless.
· You will likely have collected $280 in dividends.
· You will end up with no shares and$22,780 in cash.
· You will have no further option obligations.
This best-case scenario would bring a net profit of $6,930/$15,850 = 43.7% cash-on-cash (assuming you write the puts against marginable equity already held in your margin-type account). Not too bad for a half-year trade that only requires an 11% or better move up on the underlying shares.
If ABM shares remain below $22.50 on July 16, 2010:
· The $22.50 calls will expire worthless.
· The $22.50 puts will be exercised.
· You will be forced to buy an additional 1000 ABM shares.
· You will need to lay out another $22,500 in cash.
· You will likely have collected $280 in dividends.
· You will end up with 2000 ABM shares and $280 in cash.
· You will have no further option obligations.
What’s the break-even on the whole trade?
On the original 1000 shares it’s their $20.30 /share purchase price less the $1.05 /share call premium = $19.25 /share.
On the ‘put’ shares it’s the $22.50 strike price less the $3.40 /share put premium = $19.10 /share.
Your overall break-even point would be $19.18 /share (excluding dividends). ABM shares could fall by up to 5.5% without causing a loss on this trade.
Summary:
ABM Industries is a solid, growth company at a very reasonable valuation. It appears to offer at least a 16% - 20% total return over the next 12 months.
Option savvy investors willing to buy shares and sell both put and call options for the July expiration date could see better than 40% total returns on any move up of more than 11% between now and July 16, 2010.
There is a 5.5% margin of safety to protect you on the option combination if ABM shares do not perform as expected.
Disclosure: Long ABM shares, short ABM options