ABM Industries (ABM) is the classic under-the-radar business. It provides facility management services for commercial buildings, airports, hospitals, etc. No job is too messy for ABM.
This morning, it reported Q4 2023 results. They were better-than-expected, sending its shares 13% higher in early trading.
“For full year fiscal 2023, ABM delivered solid performance in what was an unusually difficult operating environment, marked by labor shortages, wage inflation, rising interest rates and softness in commercial real estate,” stated ABM Industries CEO Scott Salmirs.
“Our team successfully navigated these challenges, and our results highlight the advantages of our end market diversification and relentless focus on our clients.”
While the company’s 2024 guidance was muted, it could be an excellent time to buy ABM stock. Here’s why.
Let’s Consider the Risk Factors
ABM has five operating segments: Business & Industry (B&I), Manufacturing & Distribution (M&D), Education, Aviation, and Technical Solutions.
In 2023, B&I and M&D accounted for 69% of its $8.1 billion in revenue. Both of these segments are expected to face headwinds in 2024. In the case of B&I, part of its coverage includes office buildings, which the move to work-from-home and hybrid business models has hurt. As for M&D, Silmirs noted in its Q4 2023 press release that “... we will be impacted by the reallocation of some business by a large client in M&D.”
In 2023, B&D revenue fell 0.2% to $4.089 billion from $4.096 billion a year earlier. While the segment’s organic revenue grew this past year due to working in Class A offices, it’s unlikely to generate significantly more revenue in 2024.
M&D had an excellent year, growing revenue by 5.6% to $1.53 billion. Unfortunately, its operating profit was flat year-over-year at $161.7 million. With the note from above regarding a big client, both revenue and operating profits should fall in the year ahead.
The company’s 2024 guidance calls for $3.30 a share in adjusted earnings at the midpoint with an adjusted EBITDA margin of 6.35%. Based on $3.50 a share in 2023, it expects 2024 adjusted earnings to fall by 20 cents or 5.7%, while its adjusted EBITDA margin should be 450 basis points lower in 2024.
Should these estimates come to fruition, 2024 will be the second consecutive year with declining EPS on a per-share basis.
The Glass Is Half-Full View
In the past five years, ABM’s revenue has grown by 25.8% from $6.44 billion in 2018 to $8.10 billion in 2023. At the same time, its operating income has increased 114.6%, from $190.8 million in 2018 to $409.5 million, which resulted in a 220 basis point increase in its operating margin to 5.1%.
So, while there might be some lumpiness in its revenue growth -- quarter by quarter and year by year -- the ultimate trajectory is higher.
Now, if you go back to the end of 2018 and look at its enterprise value as a multiple of the average trailing 12-month EBITDA for every quarter, you will see that it is lower today at 7.62x than it’s been since Q1 2022. In addition, its P/S ratio at the moment is 0.51x, lower than it’s been since Q3 2020.
I prefer companies with significant free cash flow. In 2023, ABM generated $191 million in free cash flow, up from -$30.4 million in 2022, a considerable improvement. As a result, its free cash flow yield is 4.5%. Anything between 4% and 8% is fair value territory.
So, from a valuation perspective, except for a few quarters in 2020, its shares appear cheaper than in the past five years. Thanks to today’s gains, its shares are now up nearly 13% for 2023 and 96% over the past five years and close to its five-year high of around $54.
Should You Buy ABM Stock?
If you are a dividend investor, there’s a case to be made for buying its stock.
In February, it will pay a dividend of $0.225 per share to shareholders of record on Jan. 4. The annual payment of $0.90 yields 1.8%. That’s about 26% of its adjusted net income. It plans to increase its payout ratio to 30% and 35%. More importantly, it’s paid dividends for 231 consecutive quarters.
It also repurchased 3.3 million shares of its stock in fiscal 2023 at an average price per share of $41.55, a return on investment of 21%. During Q1 2024, the board increased its share repurchase program by $150 million.
In December 2021, the company launched ELEVATE, its new business strategy to serve its clients and employees better. As part of that, it created the M&D group, which absorbed the former Technology & Manufacturer (T&M) segment. The tech clients from the old segment were then shifted into its B&I segment.
In Q4 2023, it invested nearly $11 million in ELEVATE, with more investment in the quarters ahead.
While there is no question many investors might consider ABM to be a sleepy business, the ELEVATE strategy suggests there’s more to AMB than meets the eye. Wednesday’s gains attest to that reality.
Dividend investors with a 3-5 year horizon should consider buying ABM stock.
Looking at today’s unusual options activity, the April 19/2024 $65 call looks appealing. With an ask price of $0.40, you’re looking at a down payment of just 0.6%. With a delta of 0.07374, its share price needs only rise by $5.42 to double your money on the option, providing minimal risk and potential reward.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
