Wall Street wasn't thrilled with Motley Fool Income Investor selection ServiceMaster's
For the first quarter, revenues increased 6.2%, and income from continuing operations was comparable to year-ago levels at $0.04 per share (which excludes one-time charges). These results were in line with management expectations. For the full year, the company maintains its projection that it will grow revenues in the mid-single digit range, while EPS growth will be in the low double-digits (excluding the impact of one-time charges).
In the quarterly earnings conference call, management identified several headwinds the company is facing, including higher fuel expenses, rising interest rates, and increasing health care costs. The rising interest rates are leading to what it described as a "significant" slowdown in new homebuyers. In addition, its ability to reach these new homeowners through telemarketing is being challenged by the growing national "Do Not Call" list. ServiceMaster's telemarketing sales dropped 20% year over year.
ServiceMaster wants to be an "employer of choice," and since it believes that a better health care package can help retain its best employees, its health care costs are increasing. With an auto fleet that consumes 30 million gallons of fuel annually, rising gas prices are another major concern. The company hedges roughly two-thirds of its fuel usage, but even that hasn't been enough to offset higher expenses. In this quarter alone, increased fuel expenses hurt its bottom line by $3 million. The company aims to reduce consumption by using GPS units for its fleet, which is expected to "tighten" routes and shorten drive times.
Regarding ServiceMaster's business segments, the TruGreen LandCare segment saw revenues drop slightly year over year; the company blamed mild winter conditions that resulted in fewer snow-removal sales. Bad news for one segment was welcome news for another, as TruGreen ChemLawn's revenues jumped 11% on more sales opportunities from the mild winter and earlier spring.
Given the challenges it highlighted -- rising fuel expenses, interest rates, and health care costs -- prospective investors have to be asking whether these trends will subside anytime soon. From all indications, the answer is "no." While ServiceMaster's 3.6% dividend does offer one reason to take a closer look at the company, for this Fool, a lack of significant growth prospects is reason enough to look elsewhere.
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Fool contributor Jeremy MacNealy does not own shares of any companies mentioned.
