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Why ServiceMaster Shares Rebounded 19% Today

By Rich Smith – May 8, 2020 at 5:38PM

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Sometimes the stock market doesn't make much sense.

What happened

One day after falling nearly 23% in response to a Q1 earnings miss, the stock of ServiceMaster Global Holdings (TMX) bounced right back in Friday trading, ultimately closing up 19.3%, at $4.80. Even after today's incredible bounce, though, ServiceMaster stock still sells for about $2.50 cheaper than what it cost at Wednesday's closing trade.

So what

It's not hard to figure out why ServiceMaster went down on Thursday. Its Q1 earnings report was a bit of a disaster, with $456 million in reported sales falling more than $6 million short of the consensus, and its $0.08 in pro forma earnings being less than half the $0.18 that analysts had predicted.  

Rising red stock arrow representing a stock going up drawn on a yellow background

Image source: Getty Images.

With ServiceMaster -- which provides commercial and residential services like cleaning, landscaping, and pest control -- facing pressure from COVID-19 in March, sales grew less than 9%, most of which was inorganic. And earnings, in addition to missing estimates, fell 80% year over year.

Now what

On top of all that, ServiceMaster noted that it has completed all of its authorized share repurchases and is not contemplating making any more, and that it is withdrawing its guidance for full-year fiscal 2020.

So why was ServiceMaster stock up nearly 20% in Friday trading? Management hasn't said anything since earnings came out that would seem to justify optimism. Nor have analysts rushed out and upgraded the stock for becoming cheaper after earnings -- nor should they.

Based on ServiceMaster's latest numbers, this company with weak sales growth and declining earnings sells for more than 20 times trailing free cash flow, and more than 54 times trailing earnings. (And it's even more expensive when you factor in its $1.6 billion in net debt.)

You can't even chalk this rally up to irrational exuberance because there's nothing here to be exuberant about. Sometimes the stock market just doesn't make much sense.

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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