2023-06-22 05:45:51 ET
Summary
- ABM Industries' Q2 FY23 revenues rose by 4.5% compared to Q2 FY22, with growth in aviation, manufacturing and distribution, technical solutions, and education segments.
- ABM stock is currently trading in a narrow range with no clear direction, and its main business & industry segment is struggling with slow recovery of office occupancy and lower work orders.
- Despite undervaluation and strong institutional shareholding, the modest revenue growth and weak technical chart lead to a hold rating for ABM.
ABM Industries Incorporated ( ABM ) offers integrated facility, infrastructure, and mobility solutions. It operates through Manufacturing & Distribution, Technical Solutions, Business & Industry, Education, and Aviation segments. The company provides janitorial and parking services; and provides vehicle maintenance. ABM recently announced its Q2 FY23 results. In this report, I will review its quarterly results. I believe the stock is undervalued, but its growth is modest. Hence I assign a hold rating on ABM.
Financial Analysis
ABM recently posted its Q2 FY23 results . The revenues for Q2 FY23 were $1.9 billion, a rise of 4.5% compared to Q2 FY22. I believe an increase in revenues from its aviation, manufacturing and distribution, technical solutions, and education segments was the major reason for the increase. The revenues from its aviation segment grew by 22.2% in Q2 FY23 compared to Q2 FY22. I believe a rise in leisure and business airline traffic and growth in parking activity was the main reason behind the revenue growth in its aviation segment. The revenues from its manufacturing and distribution segment grew by 4.5% in Q2 FY23 compared to Q2 FY22. I believe expansion within its life sciences and semiconductor market clients was the main reason behind the revenue growth in its manufacturing and distribution segment. The revenues from its technical solutions segment grew by 14.6% in Q2 FY23 compared to Q2 FY22. Its technical solutions segment grew mainly due to its acquisition of RavenVolt; it contributed nearly $30 million in revenue. The revenues from its education segment grew by 6% in Q2 FY23 compared to Q2 FY22. I believe the education segment benefitted from adding several new clients in Q4 FY22, which helped them grow the revenues.
The net income for Q2 FY23 was $51.9 million, a rise of 6.3% compared to Q2 FY22. I believe better cost control and higher income, especially from the aviation segment, was the main reason behind the increase. Although its revenue and net income grew in this quarter, I believe the growth was modest, and I think the main reason behind the modest revenue growth was a 0.5% decline in its business & industry segment revenue.
Technical Analysis
ABM is trading at the $42.3 level. The stock is trading in a small range of $38-$49 since May 2022. I think it is trading in a no-trading zone because it is trading in a narrow range with no clear direction. In addition, the stock price has tested the $38 level three times in the last 18 months. Recently the stock has formed a huge red candle indicating that it is headed to test the $38 level for the fourth time. I believe whenever a stock price touches a particular level several times, the strength of that particular level diminishes. So there is a high chance that the price might break the $38 level in the coming times. Hence looking at the bearish indicators, I would recommend not making any buying positions in ABM for now.
Should One Invest In ABM?
First, talking about its valuation. I will use PEG and EV / EBITDA ratios to judge its valuation. The PEG ratio is calculated by dividing a firm’s P/E ratio by its annual EPS growth, and EV / EBITDA ratio is calculated by dividing a firm’s enterprise value by its EBITDA. ABM has a PEG [FWD] ratio of 1.20x compared to the sector ratio of 1.64x and has an EV / EBITDA [FWD] ratio of 7.92x compared to the sector ratio of 10.91x. After looking at both financial ratios, I believe ABM is undervalued.
The shareholding pattern of ABM looks excellent, with institutions owning 95.18% of the shares in the company. The shareholding pattern is an important factor for me because I believe a company where institutions own more than 60% of the stake, we see less volatility in the share price fluctuations.
Now after talking about the positives. There are some points that cannot be ignored. In Q2 FY23, their four segments experienced growth in revenues. However, its revenue growth in the quarter was a modest 4.5%, and the main reason behind it was the negative revenue growth in its business & industry segment, which accounts for most of the company's revenues. Aside from its business & industry segment, every segment of the company is doing well and recovering from the damage done by Covid-19 and several other macroeconomic headwinds, especially the aviation segment. But their main segment is still struggling and experiencing close to no growth. It is still recovering from the slow recovery of office occupancy and lower work orders, which is still affecting its business & industry segment. Hence I would wait for the situation to become normal and wait until this particular segment starts to perform, which would boost the company's revenue growth. Hence despite liking its valuation, I am assigning a hold rating on ABM.
Risk
When they cannot self-perform the job needed, companies rely on subcontractors or other parties, such as joint venture partners, to do the work. These agreements could include joint ventures or subcontracts where they don't have any direct control over the performing party. They could be held responsible if one or more of our joint venture partners or subcontractors, for whatever reason, don't provide the agreed-upon services or are accused of doing so irresponsibly. They may face significant liability due to the actions or inactions of one or more of their joint venture partners or subcontractors, even though they have controls and programs in place to monitor the work of their subcontractors and joint venture partners. There can be no assurance that these controls or programs will have the desired effect.
Bottom Line
ABM has a weak technical chart, and its main business & industry segment is struggling due to which their revenue growth for the quarter was just 4.5% which is not convincing enough to buy the company’s shares. Hence despite liking its valuation, I assign a hold rating on ABM.
For further details see:
ABM Industries: Not Attractive Enough To Buy