ABM has not been a great performing stock for me (compared to investing in the Russel 3k which I comp myself to). But the pieces are falling into place.
When I first wrote up ABM in June, I said the following outcomes I saw as high probability:
ABM also has $378MM of cash on hand whereas they typically keep ~$50MM or so. So they have $328MM of excess cash today (10% of market cap).
They’ll likely continue to paydown term loan and their revolver this year, so I think by year end, barring any acquisitions, they’ll have $500MM of excess on hand, or 15% of market cap and will be basically net debt zero.
ABM typically does bolt-on transactions, but the last deal they did was for GCA, a $1.25BN acquisition acquired for 12.5x. Let’s say they do another deal.
With $500MM of excess cash at 12.5x, they could acquire another $40MM of EBITDA (increases PF EBITDA by roughly 10%).
However, they could do another GCA-like deal, but debt-funded, and leverage would only go up to 2.4x. Not bad.
Net / net, I like ABM stock. It has good resiliency. The market is also fragmented, so I expect the acquisitions to continue. Lastly, it looks cheap. Really, the cherry on top is the low guidance which may serve as a catalyst for the stock to pop later this year.
Surprise, Surprise – ABM is doing a deal! It’s a $830MM acquisition of Able Services in which ABM will get $65MM of Adj. EBITDA (so a 12.7x headline purchase price), but where they also think they can get $35MM of synergies (so 8.3x post-synergy).
The acquisition is straight down the fairway for ABM and enhances their presence in engineering services and adds ~$400MM of janitorial revenue. I’m inclined to believe the synergies and imagine a good chunk is back-office, though I understand it does look large relative to “core” EBITDA and the $65MM also includes some COVID-19 normalization adjustments.
There are puts and takes on the purchase price – but ABM expects it to be immediately accretive.
My whole point of the original post was optionality. Given ABM generated so much cash over the past year, plus was low-levered, it was easy to see a deal was coming without the need to raise outside equity capital. I like that in my longs!