ABM reported a fine Q3’21 – EBITDA increased 20% on a 14% increase in sales and was slightly ahead of expectations. However, the stock is down about 10% since reporting and was down >15% at one point.

Must be a terrible outlook, right?

Well, their EPS guide at midpoint was around consensus BUT only if you exclude costs related to their ELEVATE investment program. Otherwise EPS would be $2.67 at mid-point vs. $3.43.

ELEVATE expenses will be $72MM next year and between $150-$175MM over the next 4 years. About half of the ELEVATE spend will be digital transformation costs, 20% for growth and the rest for workforce and people capabilities.

But that investment seems well worth it.

In return, the company expects margins to exceed 7% (from 4% back in 2017 and 5% in 2019. High margin COVID clean-up work led margins to be 6-7% in 2020-21 which no one believes is sustainable).

So think better price optimization, better sales targeting across business lines, better software. Also more capable / productive labor management, which will be needed in a tight labor market. 

In addition, mgmt expects to acquire another $900MM in revenue (total of $2BN including the recent Able acquisition). That means 2025 revenue will exceed $9BN and EBITDA should exceed $630MM (from $375MM at end of 2020).

All in all, I’m a long-term investor and the company is investing for the long-term. I get the disappointment – maybe on some level this is an admission that the company has some real expenses to be competitive. At the same time, it’s not like expenses have to go up for revenue and EBITDA to be flat (that’s a real issue).

In my prior posts, I’ve noted how ABM is a compounder no one really talks about – they take cash flow from the main business and expand into others or grow their core. The company has solid exposure to warehousing, which will clearly be growing rapidly over the next 5 years with Amazon and Shopify.

As an aside, they discussed getting into more technical positions. Frankly, I know one business called Therma which does HVAC services, but for high-tech areas like labs and semiconductor fabs where HVAC truly is mission critical and limited providers can do it. I’d leap if they got this thing (currently owned by PE). Not really in their current wheelhouse, but not too far of a stretch either.

At the same time, ABM continues to look very cheap.