ABM Industries (NYSE:ABM), an often overlooked business providing facility management services for commercial buildings, airports, and hospitals, experienced a significant upswing, with its shares rising by 13% in early Wednesday trading. This surge followed the release of better-than-expected Q4 2023 results.
In response to the challenging operating environment marked by labor shortages, wage inflation, rising interest rates, and softness in commercial real estate, ABM Industries CEO Scott Salmirs acknowledged the company’s solid performance throughout the fiscal year 2023. The CEO attributed this success to the company’s end-market diversification and unwavering focus on client satisfaction.
While the 2024 guidance from ABM Industries was relatively conservative, there are compelling reasons to consider buying ABM stock.
Risk Factors
ABM operates across five segments: Business and industry (B&I), Manufacturing and Distribution (M&D), Education, Aviation, and Technical Solutions. In 2023, B&I and M&D accounted for 69% of the $8.1 billion in revenue. Both segments are anticipated to face challenges in 2024, particularly due to the impact of remote work on B&I’s coverage of office buildings and the reallocation of business by a large client in M&D.
Despite a slight decline in B&D revenue in 2023, the company experienced overall revenue growth in the past five years, showcasing resilience in its diversified business model. However, its 2024 guidance suggests a potential decline in adjusted earnings and EBITDA margin, marking the second consecutive year of diminishing EPS on a per-share basis.
The Glass Is Half-Full View
Over the past five years, ABM has demonstrated robust revenue growth and increased operating income, indicating a positive trajectory. Although there may be some fluctuations in revenue growth, the overall trend appears upward. Moreover, the current valuation of ABM’s shares, with a lower enterprise value and P/S ratio compared to recent years, suggests an attractive investment opportunity.
ABM generated $191 million in free cash flow in 2023, a significant improvement from the previous year, contributing to a favorable free cash flow yield of 4.5%. From a valuation perspective, the shares seem more affordable than in the past five years, making them an appealing option for investors.
A Good Time to Buy
For dividend investors, ABM presents a case for consideration. The company has paid dividends for 231 consecutive quarters and plans to increase its payout ratio. Additionally, ABM repurchased shares in fiscal 2023, demonstrating a commitment to shareholder value.
The company’s strategic initiatives, including the launch of ELEVATE in December 2021, indicate a forward-looking approach. While some may perceive ABM as a seemingly “sleepy” business, recent gains and strategic moves suggest a more dynamic potential.
In conclusion, for dividend investors with a 3-5-year horizon, ABM stock could be worth considering. Unusual options activity also points to potential opportunities, with the April 19/2024 $65 call appearing appealing for its minimal risk and potential reward. However, as with any investment, careful consideration of the associated risks and market conditions is advised.
Featured Image: Freepik @ armmypicca
Author Faith Yakubu 
