ABM Industries: A Clean Place

Summary

• ABM Industries has been seeing solid improvements in 2022.
• Inflation, M&A and new business lines all drive operating momentum.
• Valuation multiples are gradually coming down, as valuations look interesting enough to start to see appeal.
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Andrii Lysenko

ABM Industries (NYSE:NYSE:ABM) is a new name for me to pick up coverage upon, as the company recently made some M&A actions, all while the business has seen solid operating momentum, which results in a favorable combination of lower valuation multiples amidst earnings growth in combination with a flattish share price performance.

The Business

ABM basically takes care of people, spaces, and places in many industries. The company provides janitorial, facilities engineering, parking & transportation, integrated facilities, aviation, HVAC & mechanical, electric, power & lighting, EV charging and landscaping services in an integrated set of solutions which it provides to building owners and operators. The company has a long-term solid track record in building value as a $6 stock with a low dividend yield in 2000, has steadily seen the shares rise to the $50 mark in recent years.

These services are provided to a number of users in business, industry, aviation, education and technical solutions, among others. General business & industry is responsible for just over half of sales, with all the other segments mentioned above all contributing between half and a billion in sales.

To understand where the company comes from, we go back to late 2021 when the company posted its fiscal 2021 results. The company posted a 4% increase in sales to $6.2 billion, with growth split half-in-half between acquisitions and organic growth. By the nature of the business, the company had relatively lower margins as it posted GAAP operating profits of $206 million, for margins of just 3% and change. This translated into earnings of $1.86 per share, but this is just half the story with the difference coming largely from legal costs and settlements, and to a smaller degree from restructuring costs and amortization charges. Excluding these items, earnings came in at $3.58 per share.

Net debt stood at $820 million and with EBITDA posted at $455 million, this translated into a leverage ratio below 2 times. Shares traded around the $45 mark in December and that translated into a low earnings multiple at 13 times earnings, all while leverage is modest. With 68 million shares trading at $45, the equity valuation came in at $3.0 billion, for a $3.9 billion enterprise valuation.

What Now?

Since late in 2021, ABM has traded in a $40-$50 trading range, now trading at the middle of the range again. Part of the lack of enthusiasm comes as the company guided for 2022 adjusted earnings to fall a bit to $3.30-$3.55 per share as the nature of the business (mostly janitorial services) makes that some Covid-19 headwinds are priced in with the pandemic hopefully on its retreat.

Another reason is that GAAP earnings are only seen at $2.05-$2.30 per share as a substantial part of the difference between both estimates comes from transformation costs under its ELEVATE strategy which includes greater focus on clients and the set-up of a new business line.

In March, ABM posted very strong first quarter results with revenues up 30% to $1.9 billion following some deals made later in the fiscal year 2021 although a 9% organic growth number was pretty decent as well. Following a $0.94 per share adjusted quarterly earnings number, the company hiked the adjusted guidance to $3.50-$3.70 per share, as the GAAP earnings estimates were hiked to a midpoint of $2.75 per share, driven by a one-time contract gain posted in the first quarter. Later that month, the company announced a smaller deal, adding $70 million in annual sales after making an Irish acquisition.

Second quarter sales rose 27% to $1.9 billion as organic growth slowed down to 7% and change, with adjusted earnings down five pennies on a sequential basis to $0.89 per share, as the full year guidance was reconfirmed. Net debt rose to $1.12 billion following bolt-on dealmaking and some buybacks and with EBITDA trending at roughly $475 million a year, leverage ratios were still very okay at 2.4 times.

In August, a smaller, yet very strategic deal was announced as the company acquired RavenVolt, a provider of turn-key microgrid systems in a deal adding $70-$80 million in sales at an upfront price of $170 million, far beyond the sale multiples applied to ABM given the different nature of these activities. The purchase price could increase by another $280 million if milestone performance payments 2023, 2024 and 2025 are achieved, but for that to happen, a cumulative $150 million in EBITDA needs to be generated.

In the meantime, it were the third quarter results, as released in September, which are sound with sales up 27% to $2.0 billion on the back of 7% organic growth. Quarterly adjusted earnings came in at $0.94 per share as EBITDA improved to a run rate of $500 million, needed as pro forma net debt ticked up to $1.3 billion following the RavenVolt deal.

Part of the growth comes from inflation as well of course with many costs billed to customers, as the company hiked the adjusted earnings guidance to $3.60-$3.70 per share. Inflation is not necessarily a good thing, because outside the fact that high inflation arguably results in slower growth, not all contracts have such indexation arrangements, with some contracts being based on fixed-price contracts.

And Now?

Truth is that ABM is making some moves to sharpen the business performance including its ELEVATE program, new organizational structure, bolt-on dealmaking and focus on adjacent services like power all which looks quite promising.

That said, in the long run this is a slower growing and low-margin business, but even market leaders in such industries can create long-term value for investors, albeit that it comes at a greater challenge. Despite the low margins, the company trades at just about 12 times adjusted earnings and a higher realistic GAAP multiple of 15 times (given the continued expenses related to ELEVATE).

Net debt has been inching up a bit given the recent dealmaking and share buyback activity, but this is still manageable. With the company certainly demonstrating on earnings growth, while shares have been range bound around the $40 mark for years now, valuation multiples are gradually compressing, which is great for long-term investors. While there is not necessarily a huge trigger on the near-term horizon, it is the low current multiple which reveals long-term appeal for those investors with a long-term horizon.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.