ABM Industries Poised To Benefit From Inorganic Strategies

On Sep 11, we updated the research report on business services provider, ABM Industries Incorporated (NYSE:ABM) .

ABM has developed a platform to deliver an end-to-end service model to its clients by realigning its operational structure to an on-site, mobile and on-demand market- based structure. This realignment has improved its long-term growth prospects and provides higher margin opportunities by enabling it to better deliver end-to-end services to its clients across urban, suburban and rural areas. The company further expects to extend its global footprint and strengthen its position in existing markets through both inorganic and organic growth across the industry verticals.

ABM recently completed the acquisition of GCA Services Group for approximately $1.3 billion. Founded in 2003, GCA Services is a leading national provider of quality facility services. It is a collaboration of various regional companies. GCA Services derives majority of its revenues from the education sector and aims to grow further as more school districts outsource their facility management to invest in teachers and equipment.

The deal is likely to expand ABM’s foothold in the educational and commercial markets. In addition, the strategic transaction is expected to add approximately $1.1 billion in annual revenues and improve adjusted EBITDA by approximately $100 million. The acquisition is in sync with the core principles of the 2020 Vision and is likely to complement ABM’s industry-focused, client-centric organizational structure, yielding cost synergies of approximately $20 million to $30 million by the second full year of ownership.

The 2020 Vision plan of the company outlines its vision for the next five years. The plan hinges on three primary phases, the first of which is aimed to increase the efficiency of the company through diligent execution of the operating plan and stringent cost-reduction activities. The second phase will focus on driving growth across the realigned verticals through effective realization of the cost savings from procurement, account management and other organizational changes. The final phase of the transformation will include accelerated growth impetus from the vertical alignment and account planning systems with a continuous focus on additional cost savings. ABM is currently focusing on the second phase of the plan and remains confident of achieving $40-$50 million in savings through operational efficiencies by the end of 2017.

ABM has a healthy pipeline of future businesses with strength seen particularly in its government business. The company’s comprehensive, strategic and transformative initiatives are focused on driving sustainable profitability by effectively allocating resources to higher margin services and business verticals with a strong competitive edge. Management also reiterated that corporate restructuring initiatives are well on track to yield sustained long-term growth.

However, ABM has underperformed the industry with an average year-to-date decline of 1.6% as against a gain of 15.8% for the latter. ABM has a significant presence in the U.K. and as the European economy is highly unpredictable post the Brexit referendum, it becomes difficult for the company to increase revenues and reduce costs. The company is likely to be stifled by the renegotiated deals and restrictions imposed on trade with other European Union members. Brexit could further result in higher tariff and non-tariff barriers to trade between the U.K. and the European Union, lowering the productivity of the company. Strong competitive pressures could also limit the company’s success rate in bidding for profitable businesses and its ability to increase prices in accordance with the rising costs.

Nevertheless, we remain impressed with the long-term growth potential of this Zacks Rank #3 (Hold) stock. Better-ranked stocks in the industry include Accenture plc (NYSE:ACN) , PageGroup plc MPGPF and Rollins, Inc. (NYSE:ROL) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Accenture has a long-term earnings growth expectation of 10.3%. It has beaten earnings estimates in each of the trailing four quarters with a positive surprise of 2.6%.

PageGroup has a long-term earnings growth expectation of 15%.

Rollins is currently trading at a forward P/E of 51.5x.

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