Motley Fool Income Investor newsletter recommendation ServiceMaster (NYSE:SVM) has a healthy dividend yield of 3.4%. But is the stock priced to tempt buyers?
The company's services range from lawn care, pest control, and home security to everyday plumbing and heating/cooling repair. ServiceMaster wants you to buy a bundle of services and let it do the work for you -- the opposite of the Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) do-it-yourself business model.
While the do-it-yourselfers are racking up annual double-digit revenue growth, ServiceMaster has managed only 5.3% over the past fiscal year -- and in the first quarter registered an anemic 3% increase (compared with the prior year). Even worse, income from continuing operations fell 5.5% relative to prior-year figures. Don't expect fireworks on top-line growth; this isn't exactly a high-growth business, as people tend to partake of the company's services out of necessity, and not necessarily as luxury items.
Granted, the first quarter is the off-season, and poor March weather along with planned increases in operating improvement expenses were blamed for the earnings shortfall. The company stuck with its 2005 calendar-year guidance of mid-to-high single-digit-percentage revenue growth, with earnings per share increasing somewhat faster.
A possible concern for conservative investors is that the company's cash flow swung from a positive $16 million in last year's first quarter to a negative $148 million this year. Let's be fair: $131 million of that negative swing was for a previously disclosed IRS agreement, $45 million of which the company said it expects to recoup over the upcoming year. Still, it's cash that is no longer on the balance sheet. Also notable is that the company's first-quarter operating income covered interest expense by a reasonable 1.7 times, and 5.7 times for the trailing 12-month period (compared with the industry average of 1.3 times for the same period).
Pest-control competitors Rollins (NYSE:ROL) -- the Orkin folks -- and cleaning and sanitizing service operator Ecolab (NYSE:ECL) are both growing revenue twice as fast as ServiceMaster but sell for roughly 22 times 2006 earnings. Their dividends are a third of what ServiceMaster offers.
ServiceMaster's stock is trading sideways after last night's earnings news but is up 13% over the past 52 weeks and up 10.8% (neither of the above figures includes dividend income) since being recommended by Income Investor -- both performances handily beating the S&P 500.
Analysts expect earnings to increase 10.2% this year and 10.8% in 2006 -- giving the stock a forward multiple to 2006 earnings of 18.3 times.
So, is the stock tempting? BerkshireHathaway (NYSE:BRKa) (NYSE:BRKb) thinks so. It owns 1.9% of the company. Although the slow revenue growth is discouraging, especially in an age where service is the rage, the company is sharing its earnings growth with investors through dividends, and again, the bulk of its services are not vastly affected by fluctuations in economic conditions.
With double-digit earnings growth projected in the future and the company investing heavily in infrastructure to support its long-term prospects, the stock is tempting (to me) as a way to meet or beat the stock market's long-term performance.
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Fool contributor W.D. Crotty owns shares of Berkshire Hathaway and Home Depot. Click here to see the Fool's disclosure policy.
