The COVID-19 pandemic has brought about many changes, especially the arena of fastidious cleaning. So, it would be natural to think investing in companies whose product lines endeavor to aid us is doing so. A key player you might want to consider is ABM Industries (ABM), a company I have not written about before.
Founded in 1909, ABM provides a variety services, of many which relate to industrial cleaning. You have probably seen or have been impacted by their efforts to maintain and clean airports, office spaces, parks, and other public spaces. ABM is primarily US-focused and is the 46th largest employer in the US Fortune 500.
As ABM’s clients explore how and when they will reenter the workplace, they are intensely focused on providing their stakeholders with a safe environment. This means that ABM’s services are going to be front and center.
Looking at the financials, the company recently announced results for its second quarter ended on April 30. Adjusted or pro forma earnings from continuing operations came in at 60 cents per share, which outpaced the Street’s consensus by more than 100%, and the year-ago quarter by 27.7%.
The bottom line benefited from margin improvement and the company’s management of personnel costs necessary to align it with its new operating environment.
For the quarter, revenues came in at $1.49 billion and exceeded consensus by 3.7%. Nonetheless, that number was down 6.2% from the year-ago quarter. The year-over-year decline was due to coronavirus-related disruptions, facility closures, and service scope changes.
This was offset by a dramatically increased demand for COVID-19 related sales in the Business & Industry, Technology & Manufacturing and Education segments.
The company achieved new sales bookings of more than $500 million, a positive milestone even by pre COVID standards. Nonetheless, the COVID-19 pandemic has resulted in the company recording a pre-tax, non-cash impairment charge related to goodwill and intangible assets of $172.8 million, or $2.55 per share.
Using generally accepted accounting principles (GAAP), ABM reported a loss from continuing operations of $136.8 million, or $2.05 per share. This was driven primarily by the impairment charges. A year ago, income from continuing operations was $29.9 million, or $0.45 per share.
Pro forma earnings before interest, taxes, depreciation, and amortization (EBITDA) came in at $91 million, as compared to $84.7 million in the prior-year quarter. Also, the adjusted EBITDA margin was 6.1%, as compared to 5.3% in the year-ago quarter.
Non-GAAP or pro forma income from continuing operations was $40.4 million, up 28.3% year over year. Operating expenses decreased 7.6% from the year-ago quarter to $1.31 billion. Selling, general and administrative expenses increased 10.1% from the year-ago quarter to $119.4 million.
The company exited the second quarter with cash and cash equivalents of $555.9 million, as compared to $69.8 million at the end of the prior quarter. Long-term debt was $1.11 billion, versus $786.3 million at the end of the prior quarter.
Net cash used in operating activities totaled $162.2 million in the reported quarter. Free cash flow came in at $154.6 million.
The company’s board of directors announced a cash dividend of 18.5 cents per share, to be paid out on Aug 3, 2020, marking the company’s 217th consecutive quarterly cash dividend. The 10-year average growth rate of the dividend has been 3.2%.
On Mar 26, ABM withdrew its previously announced fiscal 2020 guidance due to the uncertainty prevailing in the market because of the coronavirus outbreak. This will make your research a bit more difficult and will lead you to place more emphasis on factors such as intrinsic value.
The intrinsic value of ABM using a free cash flow to the firm model is $57.97, as compared to a recent share price of $38.28. My earnings estimate for 2020 is $2.20 per share with a 12-month potential share price of $42.10, for a gain of 10%. There is also an indicated annual dividend yield of 1.90%.
Lauren Rudd is president of Rudd International, an asset management firm. Neither Lauren Rudd nor his employees have plans to purchase any shares discussed within 30 days, nor is there any intended inducement to buy or sell any security. You can write to Lauren Rudd at Lauren.Rudd@RuddInternational.com or call him at (941) 706-3449. For back columns go to www.RuddInternational.com.