Hard goods retailers like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) aren't the only companies benefiting from America's home-buying craze. Home maintenance guru ServiceMaster (NYSE:SVM), owner of such well-known brands as American Home Shield, TruGreen, Merry Maids and Terminix, doubled its earnings per share in the first quarter of 2004 vs. 2003 (from $0.02 to $0.04), based on a mere 6% increase in revenues.
Moreover, each of its divisions contributed to the revenue increase with top-line growth: The TruGreen lawn care, landscaping, and snow removal service had the best revenue increase at 10% (although it still lost money for the company this quarter). Home-warranty provider American Home Shield (AHS) came in second with 9% revenue growth (but a 24% increase in operating income). Third and fourth places went to Merry Maids, with 7% revenue growth and an operating loss for the quarter, and Terminix, with 5% revenue growth and 8% operating-income growth. Last place in the revenue race went to American Residential Services and American Mechanical Services (ARS/AMS), which posted 2% revenue growth, yet continued to drag the company down with its operating losses, which quadrupled from $1 million to $4 million this quarter.
In other news, ServiceMaster turned free cash flow (FCF) positive this quarter, as it was able to generate $16 million worth of cash from operations, versus a loss of $33 million this time last year. The improved operating performance allowed the company to rake in a shiny new penny per share in free cash flow, despite the company's 19% increase in capital expenditures.
That's good news, as far as it goes. But alert Fools will already have latched onto the fact that $0.01 in free cash flow is far less than the $0.04 in GAAP profits that the company reported. That is a discrepancy that bears watching over the next few quarters. We will want to see FCF track GAAP profits much more closely than they did in this quarter and, for ServiceMaster to prove itself a real bargain, it would be nice to see FCF growth begin to outpace GAAP profit growth as time goes on.
While awaiting those hoped-for developments, however, dividend lovers (such as subscribers to Motley Fool Income Investor) can take comfort in the fact that ServiceMaster also pays a hefty 3.5% dividend.
Do you want to know if buying a home warranty is right for you? Drop by our Building/Maintaining a Home board and talk it over with the experts.
Fool contributor Rich Smith owns no shares in any of the companies mentioned in this article, although he is a customer of all three.
