Picking one stock for the coming year is fun, and it’s a bit tricky, especially in the current market. Last year, I went with a relative underperformer that showed promising growth potential and looked like a takeover candidate. Fortegra Financial Corp (FRF) did indeed get acquired, resulting in a nice 20% gainer.
Because we’re ending 2014 with higher-than-normal volatility, plummeting oil prices that are unnerving investors, concerns over the global economy and uncertainty over interest rates in 2015, I’m taking a similar approach this year. It makes sense to look for a company with growing earnings that is reasonably valued when a lot of valuations are still somewhat stretched.
ABM Industries, Inc. (ABM) fits the bill nicely and yields 2.3% to boot. It may not be the sexiest business, but the stock is a nice combination of solid upside potential and a reasonable risk.
Formally known as American Building Maintenance Industries, ABM provides exactly what its name says — maintenance services for thousands of commercial, industrial, governmental and residential facilities throughout the country. The company consists of five segments: Janitorial (roughly 50% of revenue and profit), Facility Services (mechanical engineering and technical services), Parking, Building & Energy Solutions (heating, ventilation, etc.) and Security.
ABM Stock Set to Soar on Earnings Growth
The stock first popped on my radar because earnings growth has been picking up again. After making it through the financial crisis in solid shape and growing earnings from 2007 to 2010, earnings flat-lined, hurt by higher worker’s compensation expenses and start-up costs for new contracts. Recent results have improved.
In the fiscal third quarter (reported Sept. 3), revenues increased 4.9% and adjusted earnings grew nearly 15%. The fourth quarter (reported Dec. 8) was also strong, with revenues up 5% and adjusted operating income increasing 10%, bumping earnings up to 52 cents per share from 48 cents the year before.
Yes, EPS came in 6 cents below expectations, but this was strictly due to the absence of an 8-cent per share tax benefit that had been included in previous guidance as Congress failed to extend the Work Opportunity Tax Credit (WOTC) retroactively.
What moved ABM stock after the last report was fiscal 2015 guidance, which was disappointing to some traders. Management forecast adjusted earnings of $1.65 to $1.75 per share, up from $1.57 in fiscal 2014 but below the expected $1.80 per share.
At first, the stock fell nearly 5% after the earnings report, but it quickly rebounded to close the day up 4%. I believe analysts largely viewed the guidance as conservative, and given the current strength in the company’s largest businesses (the Janitorial segment increased operating profits 13.5%), I expect ABM to come in at the high end of its forecast for 10% growth.
So we have a company with a solid long-term record that is back on track to grow earnings. The balance sheet is strong, and the 2.4% yield is attractive. And in the big picture, the improving U.S. economy should continue to benefit ABM stock in both the short and long term. With concerns over the global economy are increasing, the U.S. is increasingly viewed as the source of growth and the place to be.
For these reasons, ABM is my pick for 2015. The stock has acted well recently, recovering nicely from its October lows, and I expect the stock to move to new highs in 2015.