The market has been beating up on Motley Fool Income Investor selection ServiceMaster
The company's earnings and sales came in a little bit lighter than analysts had expected for the quarter: $0.08 from continuing operations ($0.09 in total) and $719.6 million, respectively. Analysts had expected $0.10 per share and in the neighborhood of $910 million. But in this case, I really don't care what analysts were expecting; for the year, the company noted multiple times in its conference call that earnings were in line with its expectations.
The lawn-care, pest-control, and plumbing service company also expects low-double-digit growth in earnings for 2006, because of mid- to high-single-digit revenue growth, the sale of two of its business units, and the acquisition of InStar Services Group (a disaster relief and recovery services provider). In 2007, the company believes it can begin achieving mid-teens earnings growth, since the full realignment of its business should be in place. Right now these are just promises, but they're worth making note of.
After reading through the conference call transcript, it seems that the biggest concerns are growth in the American Home Shield business. Home sales are slowing, and there's some question about the company's ability to begin growing its other businesses at higher rates as it completes its move from a telemarketing sales approach to an approach that relies on mail and neighborhood sales. It's a legitimate concern, but based on the average annual cash flow that ServiceMaster has generated over the last six years, the company now trades at an inexpensive price-to-free cash flow multiple of 12.3.
Naturally, a discounted cash flow analysis will yield more useful results with regards to how quickly ServiceMaster needs to grow in order to justify its current valuation. With such a low multiple-to-free cash flow, share repurchases, and another annual increase in the dividend likely, it doesn't take much growth to get market-beating returns from today's prices.
Different parts of the company compete with Scotts Miracle-Gro
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