Diversified industrial and facilities services company ABM Industries (NYSE:ABM) announced better-than-expected results in Q2 CY2024, with revenue up 3.2% year on year to $2.09 billion. It made a non-GAAP profit of $0.94 per share, improving from its profit of $0.79 per share in the same quarter last year.

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ABM Industries (ABM) Q2 CY2024 Highlights:
Revenue: $2.09 billion vs analyst estimates of $2.04 billion (2.8% beat)
EPS (non-GAAP): $0.94 vs analyst estimates of $0.85 (10.7% beat)
EPS (non-GAAP) guidance for the full year is $3.51 at the midpoint, beating analyst estimates by 1.2%
Gross Margin (GAAP): 12.6%, in line with the same quarter last year
EBITDA Margin: 6.1%, in line with the same quarter last year
Free Cash Flow Margin: 3.1%, down from 6.8% in the same quarter last year
Organic Revenue rose 2.8% year on year, in line with the same quarter last year
Market Capitalization: $3.52 billion

“ABM’s strong third quarter performance is further validation that our strategy is working. Our investments in the energy resiliency markets, particularly in microgrids, which grew significantly, as well as those investments in technology, including tools that improve labor efficiency and our go-to-market approach, helped us deliver another quarter of solid organic growth on an enterprise level and resilient margins,” said Scott Salmirs, President & Chief Executive Officer.

Started with a $4.50 investment to purchase a bucket, sponge, and mop, ABM (NYSE:ABM) offers janitorial, parking, and facility services.

Facility Services

Many facility services are non-discretionary (office building bathrooms need to be cleaned), recurring, and performed through contracts. This makes for more predictable and stickier revenue streams. However, COVID changed the game regarding commercial real estate, and office vacancies remain high as hybrid work seems here to stay. This is a headwind for demand, and facility services companies are also at the whim of economic cycles. Interest rates, for example, can greatly impact commercial construction projects that drive incremental demand for these companies’ services.

Sales Growth

A company’s long-term performance can indicate its business quality. Any business can put up a good quarter or two, but many enduring ones tend to grow for years. Over the last five years, ABM Industries grew its sales at a weak 4.9% compounded annual growth rate. This shows it failed to expand in any major way and is a rough starting point for our analysis.

Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. ABM Industries’s annualized revenue growth of 5.1% over the last two years aligns with its five-year trend, suggesting its demand was consistently weak.

We can dig further into the company’s sales dynamics by analyzing its organic revenue, which strips out one-time events like acquisitions and currency fluctuations because they don’t accurately reflect its fundamentals. Over the last two years, ABM Industries’s organic revenue averaged 3% year-on-year growth. Because this number is lower than its normal revenue growth, we can see that some mixture of acquisitions and foreign exchange rates boosted its headline performance.

This quarter, ABM Industries reported reasonable year-on-year revenue growth of 3.2%, and its $2.09 billion of revenue topped Wall Street’s estimates by 2.8%. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months, a deceleration from this quarter.

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Operating Margin

Operating margin is a key measure of profitability. Think of it as net income–the bottom line–excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

ABM Industries was profitable over the last five years but held back by its large expense base. It demonstrated lousy profitability for an industrials business, producing an average operating margin of 3.7%. This result isn’t too surprising given its low gross margin as a starting point.

On the bright side, ABM Industries’s annual operating margin rose by 2.2 percentage points over the last five years

In Q2, ABM Industries generated an operating profit margin of 1.8%, down 5.1 percentage points year on year. Since ABM Industries’s operating margin decreased more than its gross margin, we can assume the company was recently less efficient because expenses such as sales, marketing, R&D, and administrative overhead increased.

 

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth was profitable.

ABM Industries’s EPS grew at a spectacular 14.9% compounded annual growth rate over the last five years, higher than its 4.9% annualized revenue growth. This tells us the company became more profitable as it expanded.

We can take a deeper look into ABM Industries’s earnings quality to better understand the drivers of its performance. As we mentioned earlier, ABM Industries’s operating margin declined this quarter but expanded by 2.2 percentage points over the last five years. Its share count also shrank by 5.2%, and these factors together are positive signs for shareholders because improving profitability and share buybacks turbocharge EPS growth relative to revenue growth.

Like with revenue, we also analyze EPS over a shorter period to see if we are missing a change in the business. For ABM Industries, EPS didn’t budge over the last two years, a regression from its five-year trend. We hope it can revert to earnings growth in the coming years.

In Q2, ABM Industries reported EPS at $0.94, up from $0.79 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects ABM Industries to perform poorly. Analysts are projecting its EPS of $3.69 in the last year to shrink by 2.4% to $3.60.

Key Takeaways from ABM Industries’s Q2 Results

We were impressed by how significantly ABM Industries blew past analysts’ revenue expectations this quarter. We were also glad its organic revenue topped Wall Street’s estimates. Looking ahead, full-year EPS guidance also exceeded expectations. Zooming out, we think this was a solid quarter. The stock traded up 7.1% to $60.10 immediately after reporting.

ABM Industries may have had a good quarter, but does that mean you should invest right now? When making that decision, it’s important to consider its valuation, business qualities, as well as what has happened in the latest quarter. We cover that in our actionable full research report which you can read here, it’s free.