Best Stocks for 2015: ABM Chugs Along Despite Recent Trough

Editor’s note: This column is part of our Best Stocks for 2015 contest. Hilary Kramer’s pick for the contest is ABM Industries (ABM).

When we last glanced at my pick in the Best Stocks for 2015 contest, I was very impressed with ABM Industries’ (ABM) steady skyward climb.

10BEST2015_185x185At its high in mid-August, the stock was knocking on the door of an 18% return, but then got hit along with the rest of the market in the recent selloff.

Since then, ABM has given up most (but not all) of its gains, and is currently hovering near where it started at the beginning of the year. But despite its lukewarm performance in recent weeks, the company’s solid positive trend before the widespread market panic means I’m still optimistic about the stock’s future.

Why ABM Stock?

Before we tackle my predictions for the rest of the year, I wanted to take a moment to review what this company does and why I originally picked it.

ABM is a maintenance company that provides services to thousands of commercial, industrial, government and residential facilities throughout the United States. The company is divided into five segments: Janitorial (roughly 50% of revenue and profit), Facility Services, Parking, Building & Energy Solutions, and Security.

Near the end of last year, the company was consistently growing earnings and had a reasonable valuation. Its 2.3% dividend yield at the beginning of 2015 only made it more attractive. Overall, ABM seemed to have solid upside potential — which has been proven true, given its recent high — and reasonable downside risk. That story hasn’t changed.

However, fiscal third-quarter earnings released in early September were disappointing, due mostly to higher-than-expected workmen’s compensation claims. As a result, ABM only earned 3 cents per share versus 34 cents last year; even excluding the compensation charges, the company earned 47 cents per share, which came in 2 cents less than analysts’ expectations.

Still, I have reason to believe the future is promising for ABM. Organic sales growth last quarter was decent at 2.8%, and up 5.7% overall including acquisitions.

Plus, the company also announced a restructuring effort that should lift profitability in the future. Excluding the one-time charges, earnings per share will be $1.70 to $1.75 for the October 2015 fiscal year, up from $1.57 last year.

Higher self-insurance costs will limit EPS gains next year, but ABM should still earn $1.80 per share in fiscal 2016. At that point, the restructuring benefits will kick in, as well as the impact of the $200 million share buyback program the company recently announced.

Frankly, there was always some inherent risk behind the company’s self-insured worker’s compensation expense, and ABM suffered for it this year. Nonetheless, the company has an excellent franchise that should hold up well even as the global economy weakens, which is why I made it my pick for the year to begin with.

ABM stock is fairly valued at 16 times fiscal 2016 EPS estimates and pays a 2.1% dividend yield, so regardless of its recent dips, I still think ABM is a solid pick with plenty of room to grow.

Hilary Kramer is the editor of GameChangersBreakout Stocks Under $10High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.

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