ABM Industries Earnings Preview

May.27.11 | About: ABM Industries (ABM)

ABM Industries Inc. (NYSE:ABM) is expected to announce its second quarter 2011 results. The current Zacks Consensus Estimate is 27 cents for the relevant quarter, projecting a year-over-year growth of 16.3%.

With respect to earnings surprises, over the trailing four quarters, ABM Industries fell short of the Zacks Consensus Estimate in the first quarter of fiscal 2011 and second quarter of fiscal 2010. ABM Industries however was at par with the Zacks Consensus Estimates in the third and fourth quarters of fiscal 2010. The average earnings surprise was a negative 15.03%, implying that ABM Industries has fallen short of the Zacks Consensus Estimate by the same magnitude over the last four quarters.

First Quarter Recap

The company reported first-quarter 2011 adjusted EPS of 22 cents, falling 19% short of the Zacks Consensus Estimate as well as the prior-year quarter EPS of 27 cents.

The EPS in the reported quarter excluded acquisition costs, after-tax transaction costs associated with The Linc Group acquisition and costs for litigation contingency. The prior-year figure excluded acquisition costs and charges related to the company's corporate initiatives. Excluding these items, EPS in the quarter was 16 cents versus 24 cents in the year-ago quarter.

Total revenue in the quarter under review increased 18.3% year over year to $1,029.2 million but lagged the Zacks Consensus Estimate of $1,057 million. The year-over-year growth in revenues was driven by improved performance across all its segments. Further, the businesses acquired during the year – Diversco, L&R Parking companies and The Linc Group – augmented sales in the quarter.

Looking Forward

ABM Industries expects sales generated by the newly-acquired businesses along with a return to organic growth to continue to produce year-over-year revenue gains for the 2011 fiscal year. Management reiterated its fiscal 2011 EPS guidance range of $1.43 to $1.53. Including transaction and integration costs, management expects EPS to be in the range of $1.23 to $1.33.

Estimate Revision Trend

For the second quarter, none of the 4 analysts covering ABM Industries have raised their estimates over the past 60 days. The current Zacks Consensus Estimate is 27 cents for the second quarter, a 16.3% estimated growth from 23 cents in the year-ago quarter. For fiscal 2011, the Zacks Consensus Estimate stands at $1.46, an annualized growth of 8.58%.

A plateau in estimate revisions reflects the absence of any major catalyst driving the quarterly results. Consequently, most of the analysts are abiding by estimates projected following the release of first quarter earnings.

Magnitude of Estimate Revisions

Over the past 60 days, earnings estimates have not budged for ABM Industries. The last change in estimates was 90 days ago when the estimate for the second quarter of fiscal 2011 dropped 7 cents to 27 cents. Over the past 90 days, the fiscal 2011 estimate went down to $1.46 from $1.49.

Our Take

During 2009, the company had experienced losses in client contracts that exceeded new business wins, reductions in the level and scope of client services, contract price compression and declines in the level of tag work, primarily in the Janitorial segment. These losses and reductions continued to influence results throughout 2010.

Even though revenues have shown an improvement in the first quarter, they mostly came from acquisitions. ABM Industries' acquisition driven growth strategy has its own inherent risks. A slowdown in acquisitions could lead to a slower growth rate, constant or lower margins, as well as lower revenue growth. Further, the process of integration may create unforeseen difficulties and expenses. We await the company's return to solid organic growth. We currently have a Zacks #3 Rank (short-term Hold recommendation) on the stock.

ABM Industries operates through its subsidiaries and is the leading provider of facility services in the United States. The company provides janitorial, facility, engineering, parking and security services for thousands of commercial, industrial, institutional and retail facilities across the United States, Puerto Rico and British Columbia, Canada.

The company's business services include ABM Janitorial Services, ABM Facility Services, ABM Engineering Services, Ampco System Parking and ABM Security Services. It competes with privately held ARAMARK Corporation, Central Parking Corporation and UNICCO Service Company.