On Mar 7, Zacks Investment Research downgraded leading provider of facility solutions ABM Industries IncorporatedABM to a Zacks Rank #3 (Hold) from a Zacks Rank #2 (Buy). Despite the downgrade, the stock is currently trading at a forward P/E of 16.1x with long-term earnings growth expectation of 8.0%, which reflects its inherent growth prospects.
Why the Downgrade?
ABM reported lackluster first-quarter fiscal 2015 results with adjusted earnings of 38 cents per share marginally beating the Zacks Consensus Estimate by a penny. Adjusted operating profit remained relatively flat year over year at $25.8 million. Adjusted EBITDA was also flat at $41.3 million.
Given the low cost of entry into the facility services business, ABM faces intense competition from local and national players. Furthermore, the company faces indirect competition from building owners or tenants, who perform one or more of these services internally in order to cut down costs, especially in the areas where external services are subject to sales tax. These strong competitive pressures limit the company's success rate in bidding for profitable businesses and its ability to increase prices in accordance with the rising costs.
However, 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 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's strategy entails growth through both inorganic and organic growth. The company has a healthy pipeline of future businesses with strength particularly seen in its government business. In addition, ABM expects to improve its profitability with seamless integration of acquired businesses and newer contracts. During the last earnings call, management reiterated that corporate restructuring initiatives were well on track to yield sustained long-term growth momentum.
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