ABM Industries (ABM) Down 3.1% Since Earnings Report: Can It Rebound?

It has been more than a month since the last earnings report for ABM Industries Incorporated ABM. Shares have lost about 3.1% in that time frame, outperforming the market.

Will the recent negative trend continue leading up to the stock’s next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.

ABM Industries Misses Q3 Earnings Despite Revenue Rise

ABM recorded third-quarter fiscal 2017 (ended Jul 31, 2017) net income of $32.9 million or 58 cents per share compared with $31.1 million or 55 cents per share in the year-earlier quarter. The year-over-year improvement in GAAP earnings was largely driven by higher revenues and lower selling, general and administrative expenses.

Adjusted earnings (from continuing operations) for the reported quarter were $29.1 million or 51 cents per share compared with $30.6 million or 54 cents per share in the year-ago quarter. The year-over-year decrease in adjusted earnings, despite top-line growth, was primarily attributable to the termination of a contract within the Aviation segment. Adjusted earnings for the quarter missed the Zacks Consensus Estimate by 2 cents.

Top-Line Improvement

Revenues for the reported quarter increased 1.7% year over year to $1,318.4 million, largely driven by higher organic and inorganic growth. Organic growth (excluding the Government Services business) improved 2.3% year over year while acquisitions contributed $8.7 million of incremental revenues during the quarter. The organic growth in the Aviation segment was driven by higher passenger services, cabin cleaning, parking, catering and transportation services for new and existing customers. The organic growth in the Business & Industry segment was led by higher janitorial and facility services revenues in the U.S. and U.K. operations. Quarterly revenues exceeded the Zacks Consensus Estimate of $1,317 million.

Operating profit improved to $22.6 million from $18.5 million in the year-ago period, owing to higher revenue contribution and organizational savings due to the Vision 2020 plan. Adjusted EBITDA (earnings before interest, tax, depreciation and amortization) for the reported quarter decreased to $57.3 million from $61.1 million in the year-earlier quarter for respective margins of 4.3% and 4.7% owing to an additional working day during the quarter.

Acquisition

Subsequent to the quarter end, ABM 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 find savings 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 tune 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.

Financial Position

Cash and cash equivalents at the quarter end were $47.7 million with total debt aggregating $392.4 million. Net cash utilized by operating activities during the quarter was $22.8 million as against cash flow of $18.6 million in the prior-year period.

During the quarter, the company did not repurchase any shares under its share repurchase program. As of Jul 31, 2017, ABM had shares worth $134.1 million remaining for repurchase under its $200 million share buyback program.

How Have Estimates Been Moving Since Then?

 

Following the release, investors have witnessed a downward trend in fresh estimates. There has been one revision lower for the current quarter.

ABM Industries Incorporated Price and Consensus

 

ABM Industries Incorporated Price and Consensus | ABM Industries Incorporated Quote

VGM Scores

At this time, the stock has a poor Growth Score of F, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.

Our style scores indicate investors will probably be better served looking elsewhere.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of this revision also indicates a downward shift.  It's no surprise that the stock has a Zacks Rank #5 (Strong Sell). We are looking for a below average return from the stock in the next few months.

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