Long before outsourcing became a key component of business, many organizations fougnd it economical to contract out their janitorial services. ABM Industries (ABM 0.32%) started as a simple window-washing service for San Francisco businesses back in 1909. Today, ABM has more than 350 offices scattered around the world with more than 100,000 employees and annual revenues in excess of $4 billion .
In this article, we will consider where ABM Industries actually stands compared to its competitors, to help you see its possible potential and the risks it may face in the future.
Business updates
Regardless of current business conditions, buildings must be protected, cleaned, heated and cooled. Thus, ABM's business model provides a stable investing opportunity for conservative investors.
ABM Industries has paid dividends to its shareholders for an impressive 189 consecutive quarters , raising its dividend every year over the past 10 years. ABM shares have increased by about 30% year to date, and close to 37% year over year.
On June 3, 2013 the company released solid financial results for Q2, showing an 11% increase in revenue and a 20% rise in EPS. ABM Industries raised its guidance for the full year 2013 from its earlier expectation of earnings in line with analyst estimates.
Over the course of its history, the company has expanded through acquisition to achieve organic growth in a stable industry. In November of 2012, ABM Industries added a Washington, D.C.-based provider of mechanical and energy efficient solutions, Calvert-Jones, and has more recently announced key service offering expansions in operations at London's Heathrow airport and for the US Navy. ABM Industries' Healthcare division was awarded a long-term contract with Florida's Memorial Healthcare Systems, the second-largest public health care provider in the US.
While December of 2010 could hardly be considered recent, some investment firms have lately pointed to the ill-fated acquisition of The Linc Group as a major factor contributing to ABM Industries' substandard financial performance in FY 2011 and 2012. The Linc Group provided barracks services for US troops in Iraq. As the troop withdrawal accelerated in 2011, the company suffered, and so did ABM.
ABM Industries vs. the competition
In truth, ABM Industries has no direct publicly traded competitor in the US. Its primary competition comes from smaller regional and local privately owned companies. The company has a history of spotting promising competitors, then acquiring them.
The Linc Group acquisition may have backfired, but other acquisitions -- like that of Air Serv, a service provider to airports, and HHA, a provider of food and facility management services to the health care sector -- have expanded ABM's reach.
Its closest publicly traded competitor is DTZ, a subsidiary of Australia-based UGL Limited, which does not trade in the ADR (American Depository Reserve) system.
For comparison purposes, we chose two companies that compete in two of ABM Industries' markets: security and health care. The companies are micro-cap Command Security Corporation and Healthcare Services Group (HCSG -0.92%).
The following table compares some key performance metrics for the three companies:
|
Indicators |
ABM Industries |
Health Care Services Group |
Command Security Corporation |
|---|---|---|---|
|
P/E (ttm) |
19.1 |
32.4 |
44.8 |
|
P/B Ratio |
1.6 |
7.0 |
0.7 |
|
P/S Ratio |
0.3 |
1.5 |
0.1 |
|
Forward P/E |
12.7 |
27.9 |
11.3 |
|
Dividend Yield |
2.37% |
2.73% |
-- |
|
Net Income Growth (3 Year Avg) |
4.9% |
13.4% |
-32.8% |
|
Debt/Equity |
0.4 |
-- |
-- |
|
Return on Equity (ttm) |
8.6% |
22.4% |
1.7% |
|
Current Price |
$25.74 |
$24.50 |
$1.39 |
Source: Morningstar, as of Aug. 22, 2013.
Healthcare Services Group, provides services to health care support operations such as laundry, dietary service, and facility maintenance in the health-care industry. Typically, these services involve administrative, management, and operating expertise. This company has an edge in past performance, but ABM Industries' forward-looking valuations and book value appear more attractive.
With a market cap of a mere $13 million, one could consider Command Security Corporation a penny stock. The company serves commercial, industrial, financial, governmental, and aviation sectors across the US with uniformed security officers and other security services. The company's past financial performance doesn't look strong, and the Q1 2014 results it released in mid-August were disappointing. Although revenues increased 6.5%, both net income and earnings per share fell due to ongoing litigation costs.
What does the future hold?
ABM may already have turned the corner, since its latest positive quarterly results followed an equally positive report for Q4 2012, with an impressive 53.9% increase in net income. For the full fiscal year 2012, however, its net income declined 8.6%.
ABM Industries has a strong balance sheet with operating cash flow of $133 million and free cash flow of $111 million, both TTM. The company has the cash to continue its strategy of growth by acquisition.
The US economy is in a painfully slow recovery, but as business operations expand ABM Industries stands to benefit from more facilities needing the company's services.
In essence, ABM Industries is not a "make or break" stock. The company survived the financial crash because businesses cannot completely eliminate many of the non-discretionary services the company provides. However, one thing to watch is the company's presence in the health care sector, which stands to benefit substantially from the onset of baby boomer retirements.
Final verdict
ABM Industries has been in business for 103 years, and there is no reason to believe the company cannot survive another 103. Facilities management is not a field likely to be revolutionized by game-changing technological breakthroughs. This is a solid company with a sturdy record of dividend payments for income investors. Its recent financial performance issues leave the stock trading at less than two times book value, making it an attractive value proposition as well.
