adminIn the fall of 2022, I called shares of ABM Industries Incorporated (NYSE:ABM) a clean place. The company was seeing a growth acceleration, although aided by inflationary pressures. Ever since, growth slowed down amidst inflation coming down, tight labor markets and some client groups facing harsher times.
Given this slower growth and modest margin pressure, earnings per share have been coming in flattish, but appeal should be seen if growth, but certainly margins, might recover going forward.
This makes me cautiously upbeat on ABM here, as I am looking to buy dips, although I do not expect miracle returns here.
Taking Care Of People, Spaces, and Places
The mission header is basically what ABM is all about. The company provides services related to janitorial, facilities engineering, parking & transportation, aviation, HVAC & mechanical, power & lighting, EV charging and landscaping services.
These integrated set of solutions appeal to both building owners and operators, which like to outsource these tasks, as the company has been a long-term value creator. Typical customers are found in industrial applications, aviation, real estate, education, among others.
The nature of these tasks and services make that the company carries a relatively low operating margin profile. Post pandemic, the company posted a 4% increase in fiscal 2021 sales to $6.2 billion, with GAAP operating margins posted at 3% and change. GAAP earnings came in at $1.86 per share, although that the adjusted numbers came in at a more comfortable $3.58 per share.
Net debt of $820 million came in at less than 2 times, with EBITDA posted at $455 million. A $45 stock in the fall of 2022 made that shares traded at just 13-14 times adjusted earnings multiple, although that GAAP earnings came in lower amidst some restructuring costs and business improvements charges.
Through 2022 the company posted strong growth, driven by organic growth, inflation and bolt-on M&A efforts, putting the company on track to generate nearly $8 billion in sales, although that adjusted earnings were only seen higher in the $3s. Given a resulting 12-13 times adjusted earnings multiple and 15 times GAAP earnings multiple, I was performing a balancing act. With leverage up to the mid-2s, I was looking to buy around a low of $40 per share.
Still Stuck
After offering a cautious, but general positive undertone in the fall of 2022, shares of ABM have traded range bound between $40 and $50 per share in the two years which followed. Just a $40 stock at the start of the year, shares have moved up towards the $50 mark here.
Forwarding to early this year, ABM posted its 2023 results, a year in which revenues were up 4% to $8.1 billion, after inflationary pressures provided a big lift to the 2022 results. GAAP operating profits were up 17% to $409 million, for margins equal to 5% of sales. GAAP earnings improved by 11% to $3.79 per share. This looks better than it is, as GAAP earnings actually surpassed adjusted earnings of $3.50 per share, down sixteen cents on the year before.
Net debt was reported just over $1.3 billion, for a 2.3 times leverage ratio based on adjusted EBITDA reported at $529 million. The company offered cautionary words amidst inflation, a tight labor market and the fact that customers in the real state sector have been struggling, looking for cost savings by in-sourcing and deferring some tasks. This is weighing on the outlook for the business after a stagnant 2022 and 2023, with 2024 adjusted earnings actually seen down to $3.20-$3.40 per share. Prolonged margin pressure made that these earnings were set to come in below the 2021 results!
In March, ABM started the year on a solid note as the company hiked the full-year guidance following the first quarter earnings report. Revenues rose by nearly 4%, all driven by organic growth, with adjusted earnings per share up 9% to $0.86 per share. Following this quarter, the company hiked the full-year earnings guidance to $3.30-$3.45 per share.
In June, the company posted a mere 2% increase in second quarter results, although entirely achieved on an organic basis. These results are stronger than the company anticipated, with the company further hiking the guidance to $3.40-$3.50 per share, which at the higher end of the guidance would still imply flattish earnings developments versus 2023.
This comes after adjusted earnings in the first half of the year are coming in four cents ahead of last year at $1.73 per share. These achievements come amidst nominally lower earnings, offset by continued share buybacks. Net debt of $1.3 billion is stable for a 2.3 times leverage ratio by the comment of the company itself, although that EBITDA trails $500 million here, which made that I see leverage a tiny bit higher.
With 63 million shares trading at the $50 mark, the company commands a $3.15 billion equity valuation, or $4.45 billion enterprise valuation. This values the business at just over 0.5 times sales, as adjusted earnings multiples have expanded to 15 times amidst stagnant earnings for years now, albeit in a more tricky environment which caused some margin pressure.
A Bolt-On Deal
Towards the end of June, ABM announced the purchase of Quality Uptime Services, a player in the critical power service industry. The company provides uninterrupted power supply and battery maintenance for clients such as data centers, which makes the deal looks quite interesting. ABM will pay $115 million in cash for the firm, at a price equal to roughly 2-3% of the own valuation here.
This should be a real growth area, but unfortunately ABM did not indicate how many revenues, nor profits, would be added with this deal. While just a bolt-on deal, the sector into which ABM is moving looks promising.
And Now?
Truth be told is that I consider shares of ABM to be largely fairly valued. Revenues have risen sharply recently, but amidst a labor inflationary environment, that is not really a massive improvement. Margins generally come in line with the long-term average, although that some inflationary pressures made that earnings per share have been trading flattish for a few years now in tight labor market conditions.
Given all this, I am performing a balancing act as an earnings multiple in the mid-teens looks quite reasonable after some stagnation, amidst reasonable leverage ratios.
While I would not expect an incredible exciting return from ABM here, there is potential for some re-rating, certainly after margins recover again at some point. Amidst all this, I still think that ABM represents fair to attractive value over the long run, but the company is not a very rapid growth story, of course.
Amidst all this, I am reiterating my stance from two years ago. I am willing to buy ABM Industries Incorporated shares on dips here, after shares have been performing well so far this year, but I would like to learn more about the latest bolt-on deal.
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