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After college at The American University [BS - 1971] and dental school at University of Pennsylvania [DMD - 1977] Paul served as a dental officer in the United States Air Force both domestically and overseas in Turkey and England. As his student loans diminished he was seduced by the market.... More
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  • Clean up with ABM Industries – ABM $20.15 0 comments
    Oct 15, 2009 12:48 PM | about stocks: ABM
    ABM Industries Incorporated (ABM) is the largest publically traded facility services contractor in the United States. ABM and its subsidiaries provide janitorial, parking, security and engineering services for commercial, industrial, institutional and retail facilities in cities throughout the United States. About 5% of revenues come from Canadian operations. The Company operates through four segments: Janitorial, Parking, Security and Engineering.
     
    ABM stands for American Building Maintenance. When A/C, elevator, janitorial and other services are needed in office buildings they cannot generally be deferred. This makes ABM a very predictable business. Their long-term sales and earnings have grown nicely, as have book value and dividends.
     
    ABM was recently awarded a three-year contract to be exclusive provider of facilities services for both the Staples Center in Los Angeles (home of the Lakers) as well as the 7,100 seat Nokia Theater, Los Angeles.
     
    Here are ABM’s (split-adjusted) per share numbers from continuing operations as reported by Value Line. FYs end October 31st.
     
    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
    9.70
    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*
    67.92
    1.97
    1.32
    0.52
    13.22
    15.1x
    *FY 2009 data includes Q4 estimates from Zacks
     
    Zacks sees EPS for the year just wrapping up and for FY 2010 as $1.32 and $1.49 respectively. With ABM shares now at $20.15 ABM’s trailing multiple is about 15.3x and their forward P/E is approximately 13.5x. That’s the lowest valuation for these shares since January of 2000. Buyers back then saw their shares climb from $9.60 to $19.10 over the next seventeen months.
     
    A rebound to about 17x forward earnings would bring these shares back to north of $25 by late next year. That’s about 25% above today’s quote.
     
    The dividend is now $0.13 quarterly for a 2.58% current yield and it has been increased each year since 1995.
     
    Between the appreciation potential and yield I’d expect a 12-month total return of
    20% - 30%. That’s pretty good for a low Beta, somewhat conservative stock.
     
    By April I expect that this stock can be at least $22.50. Is that reasonable?
    I think so. ABM hit peak prices of $24, $31.20, $27.50 and $23.32 in calendar 2006-2007-2008 and already this year. Earnings through the first three quarters of this FY were $0.88 versus $0.74 or plus 18.9% even in a crap economy.          
     
    For those who are option savvy, I’d think about this short-term buy/write:
     
     
    Cash Outlay
    Cash Inflow
    Buy 1000 ABM @$20.15 /share
    $20,150
     
    Sell 10 April $22.50 calls @$1.10 /share
     
    $1,100
    Sell 10 April $22.50 puts @$3.60 /share
     
    $3,600
    Net Cash Out-of-Pocket
    $15,450
     
     
     
    If ABM shares rise to $22.50 or better (+11.7%) by the April 16, 2010 expiration date:
     
    ·         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 $260 in dividends.
    ·         You will have no further option obligations.
    ·         You will hold no shares and $25,260 in cash.
     
    That best-case scenario total return would be a profit of $9,810/$15,450 = 63.4%
     
    achieved on shares that only needed to rise by 11.7% over the six month holding period.
     
     
    What’s the downside?
     
    If ABM shares remain < $22.50 on April 16, 2010:
     
    ·         The $22.50 calls will expire worthless.
    ·         The $22.50 puts will be exercised.
    ·         You will be forced to buy another 1000 ABM shares.
    ·         You will need to lay out an additional $22,500 in cash.
    ·         You will likely have received $260 in dividends.
    ·         You will have no further option obligations.
    ·         You will end up with 2000 ABM shares and $260 in cash.  
     
     
    What’s the break-even point on the whole trade?
     
    On the first 1000 shares it’s their $20.15 /share purchase price
    less the $1.10 call premium = $19.05 /share.
     
    On the ‘put’ shares it’s the $22.50 strike price less the
    $3.60 /share put premium = $18.90 /share.
     
    Your overall break-even would be $18.98 /share (ignoring dividends) or
    $18.85 /share (including yield).
     
    ABM shares could drop as much as $1.30 /share (-6.4%) without causing a loss
    on this trade.
     
     
    Summary:
     
    ABM is a predictable grower selling at a bargain valuation while paying a current yield better than rates on bank CDs and short-term treasuries. It looks good for a 20% - 30% total return over the next year or so.
     
    Buying shares and writing $22.50 calls and puts out to April could result in even better returns if the shares climb to at least $22.50 over the next six months.
     
     
     
    Disclosure: Author is long ABM shares and short ABM options.
    Themes: long ideasd, options Stocks: ABM
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