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ABM Industries (NYSE:ABM), formerly named American Building Maintenance, is the largest publicly traded company in its field. They do contract janitorial, landscaping, parking, security, air conditioning, engineering and elevator services for customers throughout the United States and parts of Canada. FY 2007 sales [ended Oct. 2007] were an all-time record $2.8378 MM. First quarter revenues, bolstered by a November acquisition, surged from $703.5 MM to $922.6 MM year-over-year. Apples-to-apples revenues were up 4.2%.

Sales per share have grown each year since 1994. Estimated FY 2008 revenues are about $3.8 billion reflecting their recent purchase of OneSource.

ABM’s dividend has been increased in each year since 1995. The current yield is 2.27% and is a well covered 39.37% payout ratio.

EPS have grown each year since 2003 and profit margins look set to expand again after sitting at lower than historical levels over the past few years. Consensus estimates for FY 2008 are centered on $1.27 with projections of $1.55 or better for FY 2009.

At today’s quote of $21.92 ABM shares trade at < 17 times calendar year estimates versus a 10-year median P/E of 19 and the last 5-year’s average multiple of 21.4x.

ABM is now at just 13.7 times 2009 projections.

As of March 31, 2008 some large, value-oriented holders included:

  • Franklin Resources …………..7.89%
  • Bank of America …………….7.30%
  • Kayne Anderson Rudnick .…..7.17%
  • Wells Fargo ………………….6.66%
  • Barclays Global Inv………….4.42%
  • Fisher Inv…………………….3.89%

Even 18 times the $1.57 FY 2009 estimate leads me to a $28.26 target price over the next 19 months. That’s 28.9% above today’s close plus about 3.4% in yield for a total return of over 32% on this low volatility stock.

Is my target price achievable? Sure. ABM shares hit a 2007 high of $31.20 last June and fundamentals look much better now and for the future.

The absolute low prices touched in 2007 and 2008 were $19 and $18.10 even during the extraordinary sell-offs that took place.

ABM seems relatively immune to recessionary concerns as it’s hard to postpone cleaning and maintenance services. Prior periods of recession have actually seen increased revenues as more businesses made the choice to outsource these functions.

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For option savvy investors:

Here’s a low-risk way to play ABM for the period out to January 2009.

On expiration date (Jan. 20, 2009)

  • If ABM is at least $22.50 /share (up 2.7% from today’s price):
  • Your Calls will be exercised. You will sell your shares for $22,500.
  • Your Puts will expire worthless (a good thing for you as a seller).
  • You will have no shares and no options left.
  • You will have $22,500 for your $17,520 outlay.
  • You will have collected two quarterly dividends totaling $250.

That’s a net profit of $5,230 or 29.8% cash-on-cash over the 8.5 months of the trade.

That 29.8% return is on a stock that only needed to be up < 3% from your starting price.

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Here’s the return if the shares are unchanged at expiration date:

If ABM stays right at $21.92 /share:

  • Your $22.50 Calls will expire worthless.
  • Your $20 Puts will expire worthless.
  • You will still own 1000 shares of ABM worth $21,920.
  • You would have collected $250 in dividends as in the first example.
  • You can sell your shares for $21,920 and you’re done.

Your sale plus the dividends gives you $22,170 on a $17,520 net outlay.

That’s a net gain of $4,650 or 26.5% cash-on-cash over the 8.5 months of the trade.

That 26.5% return is on shares that did not move up or down.

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What’s your break-even point?

  • On the shares you own it would be $21.92 less the call premium of $2.45 = $19.47 /share.
  • On the puts you sold it would be the $20 strike price less the put premium of $1.90 = $18.10 /share.

The worst case scenario risk is to own 2000 shares of ABM at an average net cost of $18.79 /share. Thus, even if ABM declines by up to 14.2%, I would not be losing money.

That cost basis would be < 14x this year’s estimate and very close to the absolute low of the 2007-2008 period. At that price I’m quite willing to double up my share count.

 

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The examples above illustrate how you can achieve very nice total returns on ABM shares augmented with options sales. You make 26.5% or better over the 8.5 months if the shares stay unchanged or go up. You are protected from losses unless the shares decline by over 14% from your starting point.

While nobody can guarantee a bigger drop will not occur your worst-case scenario is to own a very profitable, dividend paying and quality company near its 2007 – 2008 absolute low price. That’s a very attractive risk/reward in my view.

Disclosure: Author is long ABM shares and short ABM options.

Source: Clean Up with ABM Industries