ABM Industries

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 4/5

A leading provider of integrated facility solutions, ABM operates in multiple segments, offering services from janitorial and parking solutions to specialized mechanical and electrical solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

ABM Industries, also known as ABM, is a Fortune 500 company that specializes in facility solutions for commercial, industrial, and public sector clients. It is a multinational company with about 100,000 employees with over $7B in revenues, operating across the United States, United Kingdom, Canada and several other parts of the world.

Business Overview

ABM operates in five segments, namely Business & Industry, Manufacturing & Distribution, Aviation, Education and Technical Solutions.

  • Business & Industry (B&I): This segment provides janitorial services, parking facilities, and engineering services for commercial properties, which included office buildings and commercial real estate in both the United States and abroad.
  • Manufacturing & Distribution (M&D): This segment provides manufacturing and industrial facilities with specialized cleaning, operations, engineering, and other related services.
  • Aviation: This segment provides a variety of services to airline and airports, such as ground-handling, passenger assistance, and maintenance.
  • Education: This segment focuses on facility maintenance, custodial services, grounds maintenance, and other services for schools, universities, and related facilities.
  • Technical Solutions: This provides more complex technical maintenance and repair services for facilities across multiple sectors. In addition, it works to improve energy efficiency and provides project management to customers. This segment generally has longer project durations.

In recent years, ABM has strategically focused on its core segments, particularly Aviation and Technical Solutions, by growing their revenues and improving their profitability. Notably, the company’s “Elevate” strategy prioritizes these segments, investing in new technology, training and infrastructure. They are also focused on streamlining operations and reducing their debt.

Moat Analysis

ABM’s competitive advantage primarily lies in its:

  1. Long-Term Client Relationships: ABM often works with clients for extended periods, creating high retention. They usually work within very rigid contract structures.
This provides some stability and recurring revenue. But it also makes it challenging for ABM to change contract terms and to raise prices.
  1. Geographical Presence: ABM has an enormous presence across many states in the U.S., including overseas, giving it geographic diversity and the ability to serve a diverse customer base. It uses local sales and marketing teams in each geography, providing local expertise and also building relationships with local customers.
This can make it harder for competitors to replicate its reach.
  1. Economies of Scale: ABM’s large scale allows it to spread its costs, negotiate better rates, and achieve operating efficiencies.
However, the commoditized nature of many of their services limits pricing power.
  1. Experience and Expertise: With decades of experience and extensive knowledge base in the facility solutions space, ABM builds trust with clients that are looking for specialized services and reliable providers. They also provide a range of consulting services for various building processes and engineering solutions, which can be hard to replicate.

This helps in customer retention but doesn’t allow it to fully command premium prices.

Moat Rating: 2 / 5

Despite some advantages in scale, geographic reach, brand recognition, and experience, ABM’s moat is overall narrow because of its:

  • Low Barriers to Entry: Although ABM has scale, switching costs for customers are low because they can easily switch to another supplier with similar services. The services provided by the company are not complex enough to make replicating the services very hard. Competitors have little resistance from entering their field.
  • Price Competition: In many segments, especially where services are commoditized, the competition often relies on price. And even where specialization is necessary, the prices are still usually not high enough to yield much higher margin.
  • Low Stickiness of Clients: Client retention is decent, but clients can easily switch due to the nature of the service. Most of their contracts are short or medium term rather than long term. This results in continuous pressure to compete for new contracts while also retaining existing contracts.

Risks and Resilience

Risks:

  • Economic Cycles: Since it mostly provides services for office buildings and commercial real estate, downturn in the economy will lead to lower demand for its services. Downturn in the travel industry also affect its aviation segment.
  • Inflation: An increase in inflation can reduce the company’s margin if they have difficulty raising prices with their clients. Since the company also operates on a fixed bid system for a lot of its operations, an increase in costs will affect its margins negatively.
  • Labor Costs: Labor is a major factor in its operations, and thus a rise in wages can affect the company’s profitability. With rising labor costs due to inflation, it’s going to be hard for the company to maintain profit margins.
To offset this, they are relying on automation and their ELEVATE strategy, which are showing initial promise. *   **Supply Chain Issues:** Disruptions in the supply chain, particularly with parts for building maintenance and equipment, could affect the company's delivery times and margins. *   **Competition from Niche Players:** Smaller, more nimble companies that specialize in specific areas like a certain type of facility maintenance or niche industry can compete strongly with ABM. This poses a threat because it might steal market share. *   **Intense Competition:** The facility management industry can be very intense with several firms vying for the same set of customers.

Resilience:

  • Diversified Services: ABM operates in a wide range of sectors which helps it against downturns in a particular industry.
  • Focus on Recurring Revenue: The company has some recurring revenues with maintenance contracts and repeat clients, providing some stability to its business. They are increasingly focused on attracting long-term contracts to give stability and growth in their revenues.
  • Strong Brand Name: The company’s name is known and carries some weight for customers. The company also has a long history and a strong brand with a large customer base, especially in North America. They also have experience and are able to leverage this reputation to create growth.

Financial Analysis

  • Revenues:
    • ABM’s revenue has been trending positively and has consistently grown to around $7B in revenue for the past three years (2022-2024).
    This is primarily due to the focus on growth and more customer acquisitions by the company.
*   The company has three main segments with nearly similar revenue contributions: B&I, aviation, and technical solutions.
*   The company is also focusing on revenue growth in emerging markets but it still has relatively minimal portion of its revenue coming from these markets.
  • Profit Margins:
    • The company has a history of a net profit margin around 1 to 2 percent.
    • EBITDA margins have been consistently improving, which are around 5-6%.
    This shows that the company's profitability is improving, although they are not as strong as their peer groups.
*   Operating margins are also stable, showing slight variations year over year.
*   There are multiple sources for the low margins: labor costs, pricing contracts with customers, and lack of pricing power.
  • Operating Cash Flow:
    • They usually generate enough to pay for their operations, but their free cash flow has been up and down over the years, with some periods having negative cash flow.
  • Balance Sheet:
    • ABM’s total debt-to-equity ratio has been stable around 0.5. It’s pretty well-balanced in general and not particularly worrying, though the company could focus on deleveraging.
    • Their current ratio is slightly above one, showing they can meet short-term financial obligations, but their cash balances tend to be slightly low, which could be worrying if they run into issues and need cash right away.
    • Their equity has been stable and slightly increasing.
    • Their current assets are equal to their current liabilities.
  • Valuation:
    • With a market capitalization of around $2.8B, ABM is trading roughly around 15x its annual earnings.

  • Recent Performance:

    *     For the three months ended July 31, 2024, revenue increased by 3.3%, to $2.05 billion as compared to the prior year period, as revenue growth was led by the Aviation segment, which grew by 13.2%. Operating profits decreased as their overall margins were negatively impacted by increased self-insurance costs.
*     Adjusted net income decreased by around 23% YoY, reflecting the negative impact of their self insurance costs.    *  Management has reiterated their full-year guidance and maintained strong organic growth expectations for the remaining part of the fiscal year. They also mentioned that they are seeing an acceleration in their revenue growth with their Elevate initiatives and are continuing to optimize margins in the mid-term.

Understandability Rating: 2/ 5

ABM is a relatively simple business in its operations, since it’s primarily providing services, but the complex accounting, diverse operations, and various economic situations for each of their segment makes it relatively difficult to understand and perform effective analysis on.

  • The complexity comes from their various segments, having varying economic drivers and characteristics for each one.
  • There are many factors influencing different segments and their growth, which make it hard to predict the performance of the company.
  • The company also has several complex accounting and financing choices, which makes it hard to get an accurate picture of their current situation.
  • The business has a clear focus on value creation through long term contracts and optimizing operational performance, but is still subject to the volatile environment that it operates in, which depends on changes in inflation, local conditions, and customer’s financial health.

Balance Sheet Health Rating: 4 / 5

The balance sheet is generally healthy, showing a good structure, though its relatively low cash balances are a point of concern.

  • Debt levels are well within their capability and their debt-to-equity is stable at around 0.5.
  • They have sufficient liquid assets to pay short-term obligations.
  • A reduction in debt may be useful in the medium term, to make sure the company can weather any possible downturn in the economy.
  • The company has a growing equity which shows the company is reinvesting the profits back into the business.

In summary, ABM is a company with some advantages in its scale, geographic presence, and long-term client base, but its moat is relatively low because of low barrier to entry for its services. The company’s recent performance shows its focus on a clear strategy that involves growing core business, streamlining operations, and optimizing costs. Their balance sheet is generally healthy but still carries some risks that could be mitigated over time. The valuation isn’t very high, so the potential for price appreciation is there, if the company is successful in execution.