ABM Industries: Essential Staffing
Summary
- ABM Industries provides essential and often unnoticed services that aren't going away any time soon.
- A quintessential buy-and-hold company, ABM has rewarded shareholders over the long term.
- Given the uncertainty in Q1 guidance, I'm uncomfortable paying anything more than long-term support levels at $28.50.
ABM Industries Inc. Overview
Founded in 1909, ABM Industries (NYSE:ABM) provides services, such as cleaning, electrical work, HVAC repair, landscaping, etc. through its 140,000+ employees throughout the world. You've probably seen or at least been impacted by their employees, as they maintain and clean airports, office spaces, parks, and power plants, etc. ABM is US-focused with a few international locations and is the 46th largest employer in the US Fortune 500, so their results can tell you quite a bit about the state of the US labor market. CEO Scott Salmirs has held the position for 5 years, with 17 years total experience with ABM, only the 7th CEO in the 110+ year company history.
Business Dynamics & Financials
ABM reports results from five segments, although I'll perform my analysis by service type below. Keep in mind that, these results, released on March 5th, are minimally impacted by COVID-19.
| Business | Aviation | Manufacturing | Education | Tech Sol. | |
| Q1 '20 Revenue | $820.9M | $238.7M | $233.9M | $208M | $142M |
| Y/Y Rev Change | -1.0% | -5.4% | -0.9% | -0.4% | 22% |
| Q1 '20 Op Profit | $38.2M | $5.6M | $16.7M | $11.2M | $8.3M |
| Op Margin | 4.7% | 2.3% | 7.1% | 5.4% | 5.9% |
Source: ABM 1Q20 Earnings Slides
This may be how ABM chooses to break out the company's financials, but I think the more intuitive way to understand the business is by service provided.
Cleaning - Cleaning/general custodial is ABM's biggest service spanning 4 of 5 business segments. COVID-19 provides both headwinds and tailwinds for this service depending on the specifics. COVID-19 has triggered a need for enhanced cleaning in "essential" facilities, and I would expect that mentality to continue for years. The major downside is the lack of business, especially in the near term, as remote work and learning are given preference over onsite activity. Closed restaurants and remote education will naturally lead to less need to clean. Even within aviation, I expect airports will be cleaned more frequently with more staff, but fewer airplanes means less staff needed for plane cleaning and service. A final consideration is that ABM is the largest data center cleanliness provider, an area that should see almost no impact from COVID-19. Overall, this service will be negatively impacted in the short term, but the desire for enhanced cleaning should be a longer-term tailwind as schools, businesses, and sporting arenas open up.
Landscaping - As COVID-19 cleared crowds out of indoor spaces, a lot of people moved outside congregating in parks and golf courses. ABM's landscaping service should see enhanced demand resulting from the increased utilization of outdoor spaces. Furthermore, businesses are unlikely to abandon the outdoor maintenance of their properties.
Building Administration - Think desk moves, mail and printer room operation, switchboard/help desk operation, and AV equipment. While not a huge service as a percentage of sales and a low-margin business to begin with, it is likely one of the hardest hit, while remote work remains the norm.
Parking & Transportation - ABM manages parking garages, shuttles, valet parking, and parking for special events. I expect this service to be hard hit in the near term, given the preference for remote activity. The good news is this service has a longer-term tailwind as people avoid public transportation, and some people become first-time car buyers, leading to increased demand for parking.
Technical Solutions - This segment manages electrical systems for over 62+ million sqft of critical facilities, maintain 78k+ HVAC systems, and has installed 8k+ EV charging ports across the US. Clearly, the fastest growing segment with 22% y/y growth. This growth should moderate going forward as management pushed sales opportunistically towards higher margin jobs and is ramping down sales as supply and demand come more in line. I don't see a huge impact on this segment from COVID-19 as many building owners seek to maintain their facilities whether it be for a future re-opening or building sale. However, management did set the expectation for organic growth to normalize as the CFO stated:
"it's just going to be a harder second half compare, but we're still anticipating year-on-year high single-digit growth."
Opportunities
We'll take a look at what I believe to be the top opportunities for the industry, the company, and a wildcard.
Industry - In the aftermath of the COVID-19 pandemic, expect to see public spaces place a higher emphasis on professional cleaning. As the economy re-opens, if we do see wage growth maintain, it's pre-COVID-19 momentum, custodial service providers are in a stronger bargaining position to make the case that their services are a necessary expense, not a discretionary one.
ABM - ABM has been increasing its sales staff as they seek to gain new business without sacrificing quality for existing clients. With so many essential businesses looking to institute or enhance professional cleaning programs, ABM is in a good position to win a disproportionate amount of those jobs. Mr Salmirs stated,
"I think that the good news for us is, even from when we talked to you all about it at year-end, we're probably up 5% in sales people."
Wildcard - High unemployment typically means people are willing to take jobs they ordinarily would not, even if it's short term, to make ends meet. ABM jobs are not glamorous, typically low-paying, with high turnover. While the labor pool was extraordinarily tight before, it's certainly expanded in light of high unemployment. However, this is a wildcard because unemployment benefits are so high at the moment, it's hard to imagine giving up those benefits for a job at ABM. For this opportunity to play out, Congress would have to fail to extend the additional $600 provided under the CARES Act, which doesn't seem likely at the moment.
Risks
I'll take the same approach as opportunities by looking at the top risks for the industry, the company, and a wildcard.
Industry - As discussed earlier, remote activities replacing those onsite reduce the cleaning needs of offices and schools. Furthermore, the closure of sporting arenas means a near-zero demand for cleaning, and reduced air traffic means fewer airplanes to clean and service. I expect this to be a major headwind in Q2, lightening up only as life slowly returns to pre-COVID-19 norms, which I believe it will over the next few years.
ABM - The specific risk to ABM is the heavy concentration of clients seeing dramatic demand reductions not only for cleaning but building administration and parking as well. Demand should return in time, and there are long-term tailwinds, but given the lack of clarity in Q1, an investment at this time is probably more speculation than anything. Even management, when asked about Q2 guidance, provided as much detail as possible, but in the end summarized with,
"So that was my long-winded way of saying it's too early."
Wildcard - Prior to COVID-19, the primary concern from management was a rise in wages, which begins to put ABM in the difficult position of needing to charge more for services, and their clients obviously pushing back. The potential for a democratic presidency with potential control of congress could reignite a push to double the minimum wage. That's a lot of "ifs", but the impact of that risk playing out would be a big hit to ABM.
CEO & Management Team
Over the long term, the CEO and management team have the power to either create or destroy shareholder value, so I think it's important to listen to at least one conference call and examine their history to get a feel for their character as well as possible strengths and weaknesses.
It's clear that, since becoming CEO in 2015, Mr Salmirs has prioritized growth as demonstrated not only by increased sales staff, but the 2017 acquisition of GCA, which contributed a significant amount of debt that has yet to be repaid.
Source: ABM 1Q20 Earnings Slides
GCA was the largest acquisition at $1.25B and, at the time, was expected to add $1.1B in annual revenues, and $100M in EBITDA. We can see, with the benefit of hindsight, that those estimates were at least close. Prudent acquisitions often separate the wheat from the chaff when it comes to CEOs, and judging the past comfortably from the future, this looked like a prudent acquisition.
It does unfortunately imply only 2% organic annual revenue growth for the remainder of the company. Given that history, I think a focus on organic revenue growth makes the most sense, especially given the net increase in debt.
Conclusion & Recommendations
Given the uncertainty in the business, this is one of the rare situations where I'd rather wait for Q2 guidance before getting involved. I view 5-year support, excluding the recent COVID-19 panic, around $28.5 as an attractive entry point, which I'll be adding to my watchlist. If you're a buy and hold investor and preservation of capital and a bit of income generation as your goal, ABM could be a good fit. Despite near-term headwinds, cleaning services, facility maintenance, parking services, and the many other businesses that make up ABM aren't going away any time soon.
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