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ABM Rides on Vision 2020 and GCA Buyout, Suffers Debt Woes

Zacks Equity Research

Shares of ABM Industries Incorporated ABM have gained 28.5% in the past three months, outperforming its industry’s 17.1% rally.

The company recently delivered first-quarter fiscal 2019 results with adjusted earnings (from continuing operations) of 31 cents per share, beating the Zacks Consensus Estimate by 4 cents and also increasing 19.2% year over year. Total revenues of $1.61 billion inched up 1.2% year over year on the back of 2% organic revenue growth.

ABM Industries boasts an impressive earnings surprise history, having surpassed estimates in all the trailing four quarters, the average being 6.6%. For the fiscal second quarter, the consensus estimate moved 3.6% north in the past 30 days.

Drivers of the Company

ABM Industries is currently executing 2020 Vision, a comprehensive transformation initiative, aimed at achieving operational improvement and vertical realignment.

As part of this plan, the company’s upgrade of its human resources information systems, labor management system and enterprise resource planning system is on track. It is utilizing technology to enhance account planning, labor management, payroll and procurement. ABM Industries is centralizing many of its back-office functions via Enterprise Services Center in Sugar Land. Also, the company has been able to leverage its scale, increase the purchasing power and identify preferred suppliers through consolidating purchasing activities, thereby saving cost in supplies and materials procurement.

Post complete execution, the 2020 Vision will boost long-term profits for ABM Industries on the back of an industry-based go-to-market approach.

ABM Industries Incorporated Revenue (TTM)

ABM Industries Incorporated Revenue (TTM) | ABM Industries Incorporated Quote

Moreover, the buyout of GCA Services Group has strengthened the company’s long-term financial and operational capacities, primarily in the Technology & Manufacturing, Business & Industry and Education segments. GCA is now fully embedded in ABM Industries’ organic base.

Risks

ABM Industries is a labor company at core with direct labor cost comprising the majority of its expense line. The U.S. labor market has been witnessing low unemployment levels for both skilled and unskilled labor since the beginning of the ongoing year. While the economy consistently creates new jobs despite the low jobless rate, a tight labor market is compelling companies like ABM Industries to pay higher wages for attracting and retaining employees. Labor-related headwind is weighing on the company’s operating performance.

The company’s balance sheet is highly leveraged. At the end of first-quarter fiscal 2019, long-term debt was $945.8 million while cash and cash equivalents were $30.6 million. Such a cash position implies that ABM Industries needs to generate adequate amount of operating cash flow to service its debt. High indebtedness may restrict the company’s future expansion and worsen its risk profile.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader Zacks Business Services sector are Omnicom OMC, Paychex PAYX and Automatic Data Processing ADP, each carrying a Zacks Rank #2 (Buy). Long-term expected EPS (three to five years) growth rate for Omnicom, Paychex and Automatic Data Processing is 6.9%, 8.8% and 12.8%, respectively.

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