Shares of facility services (janitorial, maintenance, and parking) provider ABM Industries (ABM -0.65%) are off to the races on Wednesday, rising 14.8% through 12:55 p.m. ET after beating expectations for Q4 earnings this morning.

Heading into its fiscal Q4 2023, analysts had forecast ABM would earn $0.92 per share (adjusted for one-time items) on sales of just over $2 billion. In fact, ABM earned $1.01 per share, adjusted, and on sales of $2.1 billion -- and beat on guidance as well.

ABM's sales and earnings

Now, not all the news was as exciting as the fact the company beat expectations. Actual sales growth in Q4 was only a modest 4%. Q4 earnings calculated according to generally accepted accounting principles (GAAP), while up an impressive 32% year over year, were only $0.96 per share, a nickel less than adjusted earnings.

But still, a beat is a beat -- and it looks like investors will take it.

CEO Scott Salmirs credited strong profit margins for the improvement in net income, highlighting "strong operating performances in our Aviation and Technical Solutions segments" and "solid performances in our Manufacturing & Distribution ... and Education segments," while the commercial real estate business encountered more difficulties.

Is ABM stock a buy?

All that being said, Q4 brought to a close a successful year in which modest, 4% sales growth yielded a respectable 11% growth in earnings. With $3.79 per share (GAAP) earned this year, ABM stock now sells for only 13.4 times earnings.

Factor in a respectable 2% dividend yield, and I'd say that price is just about right for this growth rate -- with caveats, such as:

  • Caveat No. 1: ABM beat on guidance this morning, but even so, its forecast for $3.20 to $3.40 per share in adjusted income next year (management did not give GAAP guidance) implies that profits will decline in 2024 -- perhaps by as much as 9%. That's a bit disappointing.
  • Caveat No. 2: Adding to my worries, free cash flow at the company in 2023 was only $190 million. Compared to the company's $251 million in reported net income, that means ABM is currently generating only about $0.75 in real cash profit for every $1 it reports in net income. So at a price-to-free cash flow ratio of 17.5 -- and with a sizable amount of debt on the balance sheet -- ABM is arguably quite a bit more expensive than it looks at first glance.

Ultimately, therefore, between the prospect of an imminent earnings decline and weak free cash flow that probably foreshadows such a decline, I don't think ABM stock is a buy today.