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ABM Industries Rides on Strategic Buyouts Amid High Costs

Zacks Equity Research

Shares of ABM Industries Incorporated ABM have gained 5.7% in the past six months, against the industry’s decline of 15%.

The company delivered impressive fourth-quarter fiscal 2018 results, with earnings and revenues beating the Zacks Consensus Estimate. Adjusted earnings per share (EPS) of 58 cents beat the consensus estimate by a penny and improved 56.7% on a year-over-year basis. Total revenues of $1.64 billion outpaced the consensus mark by $1.2 million and increased 10.1% year over year on the back of organic growth and contributions from the acquisition of GCA Services Group.

ABM Industries has a decent surprise history. It beat estimates in three of the trailing four quarters, the average being 1.2%. For the first quarter, the consensus estimate declined 3.6% in the past 30 days.

What’s Driving ABM Industries?

The buyout of GCA Services Group has enhanced the company’s long-term financial and operational capacities primarily in the Technology & Manufacturing, Business & Industry and Education segments. Revenues related to the acquisition amounted to more than $1 billion in fiscal 2018.

ABM Industries is currently executing 2020 Vision, which outlines its long-term vision for the next five years. The strategic plan focuses on operational improvement and vertical realignment and is contingent on three primary phases. The company is currently focusing on the second phase. Post complete execution, the plan will boost long-term profits for ABM Industries on the back of an industry-based go-to-market approach.

As a component of the first phase of 2020 Vision, ABM Industries has introduced a platform for realignment of its operational structure to an on-site, mobile and on-demand market-based structure to deliver an end-to-end service model to clients. The realignment has improved the company’s margin improvement opportunities.

Risks

Increasing expenses are a concern for ABM Industries and likely to dent bottom-line growth. The acquisition has led to operating expenses worth $682 million. These expenses have resulted in a significant rise of the company’s operating expenses (17.7% y/y) in fiscal 2018.

Further, the U.S. labor market is witnessing record low unemployment levels for skilled and unskilled labor since the beginning of 2018. While the economy continues to create new jobs despite the record low jobless rate, a tight labor market is compelling companies to hike payments to attract and retain employees. As labor costs account for majority of ABM Industries’ expenses, the labor-related headwind is likely to weigh on operations.

Zacks Rank & Stocks to Consider

Currently, ABM Industries carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A few better-ranked stocks in the Zacks Business Services sector are Mastercard Incorporated MA, Republic Services, Inc. RSG and Blucora, Inc. BCOR, each carrying a Zacks Rank #2 (Buy).

The long-term expected EPS (three to five years) growth rate for Mastercard, Republic Services and Blucora is 18.1%, 10.7% and 17.5%, respectively.

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