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Why ABM Industries Stock Popped 11% This Morning

By Rich Smith – Sep 7, 2018 at 1:31PM

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It's a swing and a miss on sales, but the profit picture is a bit better.

What happened

Shares of cleaning contractor ABM Industries (ABM -0.81%) -- a big player in government contracting but an even bigger player in commercial cleaning -- hopped 11% in early trading Friday before settling down to enjoy a still-respectable 8.7% gain as of 12:15 p.m. EDT.

Last night, ABM released fiscal third-quarter 2018 earnings results that appeared to beat analyst estimates. The company reported  only $0.51 per share GAAP, versus Wall Street expectations  for a $0.53 per share profit. ABM's pro forma profits, however, were $0.57 per share -- and it seems that's the number that Wall Street is focusing on.

Yellow mop and caution sign next to a yellow bucket, with an orange cone in the middle

ABM investors are cleaning up today. Image source: Getty Images.

So what

ABM's sales surged 23% year over year to hit $1.6 billion, which just missed Wall Street's estimate. Investors are giving ABM a pass on that "sale miss," however, which seems fair given the objectively impressive growth result.

Now what

I'm less sanguine on ABM's earnings number, though. Although Wall Street seems to think the company "beat" on earnings, the objective truth is that GAAP profits declined 12% year over year, from $0.58 in last year's Q3 to $0.51 in this year's Q3.

Granted, management appears confident it can make up lost ground, and reiterated guidance for full-year profits of $1.73 to $1.83 per diluted share. Assuming it gets there, that will be a whole lot better than the $0.07 per share ABM earned for all of 2017 (which was dragged down by a big Q1 loss). Even if ABM earns "only" $1.73, that will be the best earnings result ABM has posted in a decade.

Given that ABM already costs 26 times earnings, and that even a $1.83 annual profit will only drop the stock's P/E to about 19 times earnings, I can't call this stock cheap at a projected 16% long-term earnings growth rate and a 2.2% dividend yield. "Fairly priced" is about the best I could say for it.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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