Category: Columns

Earnings Check-in: ABM Stock Performance is Perplexing $ABM

Reading Time: 3 minutes

This update will be brief, but I wanted to highlight that ABM recently reported last week, following its M&A announcement that I covered in this note.

When I first wrote about ABM stock, I said (i) guidance was way too low, and I expect a lift in guidance across the board (ii) there’s upside optionality from doing a large acquisition and (iii) the stock is cheap.

If you had told me that ABM would go on to raise EPS guidance TWICE and announce an $830MM accretive-day-one deal, yet ABM stock would be little changed, I’d be SHOCKED. The stock is actually down about 6% since I wrote about it…

When ABM reported, they increased EPS guide now to $3.5 at mid-point. This is now at the high range of the previously stated EPS guide.

Not to brag, but this is exactly where I thought it should be, which you can see in the original table I posted:


Why the Muted Reaction?

I struggle to believe this was “priced in” to ABM stock when I first wrote about it, I just think sustainability of earnings is being questioned.  However, management actually noted the current high margin environment will likely persist for even longer than I thought:

Overall, demand for ABM’s higher-margin virus protection services remained elevated in the quarter, underscoring ongoing client concerns regarding cleaning and disinfection of their facilities. As anticipated, demand for virus protection eased slightly in the third quarter compared to the second quarter of fiscal 2021, but remained well above pre-pandemic levels. The emergence of the Delta variant and rising COVID-19 cases nationally have gained heightened interest in the need for disinfection prevention measures, particularly in high-traffic areas. As we look forward to 2022 and beyond, we believe that virus protection services will remain a contributor to our overall revenue as disinfection becomes a standard service protocol in facility maintenance programs

….So I think it’s still hard for us to pin down a formal long-term margin. We’re looking forward to giving you full year guidance in the next 3 months, and then that will give you the insight for the next year. But look, we’re going to say what we’ve continued to say throughout, which is the 2 areas for elevated margins are in disinfecting and labor arbitrage. And we believe we will permanently keep portions of that. As we restaff these buildings, we believe we’re going to be able to do it more efficiently, and we’ll capture some savings. Again, it’s still too early to figure out how much.

And then the disinfecting, we see like maybe 2 quarters ago, there was — or maybe even a quarter ago, there was no Delta variant, right? So like I think this is going to continue to evolve. And we’ve all just said it even anecdotally. It’s just… I don’t think facility managers or landlords or principals of schools, I don’t think anyone thinks it’s responsible to discontinue disinfection services, especially in high-touch areas. So that’s going to continue, too. So we believe we will continue to be elevated, but give us until next quarter when we do full year guidance to kind of give you that year outlook.


So again, I go back to the original pitch. I’m not necessarily expecting this work to last forever, but here’s what ABM will do (and basically already did):

  • they’ll generate a ton of FCF (about 11% of market cap by my math)
  • they will use cash first to pay down debt from the Able acquisition
  • Once they are in a comfortable range, they’ll buy something else
  • Rinse & Repeat

This is what compounders do, it’s just a bit frustrating when this compounder gets no love.


I think the pushback is that margins likely will go down in the future – but what does it matter if earnings DOLLARS are higher? (They buy something else, there are some structural changes in the business, aviation and education segments are roaring back at higher margins which is happening, etc.)

The point of this slide to me is not that ABM is some dividend stock, but that it does a pretty good job compounding earnings.

Earnings Check-in: $BIG Let’s Not Miss the Forest for the Trees

Reading Time: 2 minutes

$BIG reported today, August 27th and it was a miss. Guidance was also worse than expected.

  • EPS was $1.09 vs. $1.12 consensus
  • Comps were -13.2% vs. -11.4% consensus (but they were lapping a +31% Q)
  • ’21 EPS guide was $5.90-6.05 vs $6.66 consensus, with the company calling out freight and supply-chain challenges.

This is a common theme among retailers to-date. Another favorite of mine, Dollar General, reported some similar issues.

That said, it is hard for me to call this quarter “ugly.”

  • On a 2-year stack basis, sales comp’d +14%. They said so far in the next Q, they’re ahead of that.
  • As I noted in my original post, $BIG now has no debt, but is flush with cash. This is tremendous option value and they still have $293MM  left in cash (they typically might carry just $50MM).
    • They bought back ~$400MM of stock, I expect that to continue, and isn’t too shabby for a company showing $1.67BN market cap at the time of writing. Share count is down ~12% since their FYE.
    • They announced they’re using some cash to “refresh” 800 stores (a bit more than half their stores), but it’s a modest $100k per store refreshes. I imagine this is high-return investments.
    • They’re adding new stores in ’21, about 20, but noted they will 2-3x that pace in the future. Gaining scale is important for their relatively small footprint.  As a reminder, they’ve been a net store decliner over the past 5 years, but now they’re positioned for growth. 
  • They’re rolling out 2 forward DCs to help with supply chain and delivery. These are the first in the co’s history.
  • Furniture continues to comp well and this is what they’ve centered their stores on. I like that exposure.
    • Broyhill continues to chug along to being $1bn brand. They also noted, “Real Living” brand is set to be $1bn brand too.
    • They are adding sales staff specifically focused on helping folks buy furniture. In test markets, it resulted in a 15 point increase in sales. As they roll this out to more stores, they expect a 1 point increase to comps in 2022. Next imagine it rolled out to 1,400 stores…

On the call, they also stated, “Moving into Q3, our inventory situation has improved, and we have seen a resurgence in sales with early strength from our Halloween and Harvest assortment. Although supply chain pressures related to Asian port and manufacturing disruption will continue to create challenges, we are much better prepared to win at the all-important holiday season.”

So where I am sitting, I still like the story. Again, at the time of writing, the market cap is $1.67BN. However, they do have $293MM of cash which it seems like they can reinvest in the business.

Even with the guide down, the stock is trading at 6.6x EPS ex-cash. That seems too cheap to me. If the market wants to price $BIG as the same story as what it was 2,3, 5 years ago, I think that is incorrect.  Supply chain woes will be temporary in my mind as well.

 

Surprise, Surprise: $ABM Acquiring Player in $830mm Deal

Reading Time: 2 minutes

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!

Earnings Check-in: $ITRN Unveils Hidden Bringg Asset Worth Third of Market Cap

Reading Time: 2 minutes

Ituran posted solid results for Q2’21. OEM subscribers notched a gain and aftermarket continued to plug away subscriber gains. They gained 24,000 subs, well ahead of the typical range of 15-20k per quarter. Given operating leverage, EBITDA reached its highest level in 2 years, which makes sense now that the OEM business has stabilized.

I also really liked what they had to say about Brazil and their future there:

“Once we decide to take our technology from the Israeli market, duplicated to the Brazilian market. I’m talking about gaining more and more market share, and I will be a little bit arrogant. And I think that in 2 or 3 years from now, we will be the largest fleet management and telematics services in Brazil. We are growing exponentially from month to month. And I really believe that in 2022, this will allow us to increase materially the numbers of subscribers, the net subscribers growth in Brazil apart from the Ituran SVR. And the third segment that we do it in Brazil and in Mexico, by the way, is duplicate our business from the United States. The U.S. business of Ituran is quite small, but it’s something that is very unique to run traditional applications.”

Please go back and read my initial post on the company as well as the Q1 recap for more.

Ituran also renewed its share repurchase program, which is a positive addition to the dividend. They’ve paid down a considerable amount of debt, which I expect to continue, but the return of capital story is more positive than I expected.

Ituran continues to print cash and I think the market underestimates this recurring business. The stock still trades at ~6.5x 2022 consensus estimates. 

However, that number drops even further when you account for Bringg, an investment Ituran made in 2014.

 “In June, one of our early-stage mobility technology holdings, Bringg, a company we seeded in 2014, raised capital from leading venture capital investors. We are very proud that in only seven years, this company, of which  Ituran remains the largest shareholder with 17%, has grown to its current valuation of $1 billion and it is still valued at close to zero on our balance sheet. Ituran prides itself on its ability to correctly read market trends and invest into disruptive mobility technologies. Our investment in Bringg is a successful element of this strategy and has become a strong value-add to Ituran and its shareholders.”

The Bringg stake is therefore worth $170MM to Ituran, valued at zero on the balance sheet, and foots to about a third of Ituran’s market cap.

Adding everything non-core, Ituran trades at less than 4x ’22 EBITDA:

Ituran ex-non core assets

Earnings Check-In: $CVEO – Cash Flow Will Prove Itself

Reading Time: 4 minutes

My original thesis on CVEO stock was pretty simple:

  • This is a business that has been impacted both by a commodity downturn and COVID (hit occupancy).
  • With where things are, I think their earnings should improve over time
  • I also think the US will likely improve as we still are underinvesting back in O&G and E&Ps are only disciplined for so long…. but that’s just upside
  • I think where commodity prices are at this point will also mean producers will eventually be willing to commit to new projects and that will drive demand for CVEO’s lodging and hospitality services.
  • CVEO’s balance sheet is in great shape, limited BK risk, and generating solid FCF

However! You don’t need to bank on much. You just need to think things won’t get too worse given the company generates good FCF. And there was evidence things would at least level out.

I was pleased to see CVEO report Q2’21 EBITDA in-line with estimates ($32MM), generated good FCF again (~$14MM) which all went to pay down debt. The company is 2.0x levered now.


How are things moving from a trajectory standpoint? Sorry I’m ripping a bunch of comments from the call:

We are encouraged by the decline in COVID-19 cases in Canada and hope this trend allows our customers to continue to normalized operations.

The British Columbia health order, which temporarily limited occupancy at all industrial projects in the province, including our Sitka lodge, was lifted late in the second quarter. Now that, that order has been lifted, we have seen an uplift in occupancy as our customer works to catch up on their project time line. These expectations are in line with the EBITDA guidance that we are maintaining from the last quarter. Yes, we’ve seen much better turnaround activity.

Second quarter was in line with expectations despite the fact that we had one customer push some of their activity from Q2 to Q3. But it appears that that activity will come through. But turnaround activity in Canada is clearly much improved year-over-year.

For the full year, we’re still expecting Canadian billed rooms to be approximately 2.3 million billed rooms, a little over that compared to 2.1 million billed rooms last year. That improvement is both operational as well as better turnaround activity over year. Going into the third quarter, we’ve seen better occupancy for most of the second quarter, we averaged about 5,000 Canadian guests a day, and now we’re averaging a little bit over 6,000. So things are improving, but certainly not to where we were pre-pandemic.

In Australia, we anticipate that the prolonged travel restrictions related to the COVID-19 pandemic will continue to pressure our performance in the region with increased labor costs anticipated to be a factor that we can continue to — that will continue to impact our margins.

The outlook for metallurgical coal markets in Australia for 2021 has continued to be impacted by the Chinese trade policy. So increased interest in Australian met coal outside of China has built some of the negative impacts.


Ok so Australia still has a lot of caution… however, if China wants to help dampen commodity prices, like it is trying to do, then they probably want to end a silly trade dispute.

We expect a supportive commodity price environment to remain for the rest of the year with met coal currently trading above $200 per ton. The met coal prices are at much healthier levels than we had last provided revenue and EBITDA guidance.

We have chosen not to increase our expectations for the back half of the year for the Australian segment. Our customers continue to be hesitant to increase activity in light of the lingering China-Australia trade dispute.

Our current guidance does not assume a material improvement or degradation in the Australian-Chinese trade dispute, nor does it assume a material improvement or degradation in labor costs.

It seems like they are being very conservative with Australia assumptions. Perhaps 2022 will be better…

Importantly, they increased the FCF guide again… now $68MM at mid-point. So even though shares have moved up, we’re still talking about a 22% FCF yield on CVEO stock.

I kind of hate it when people say, “look I get the pitch, but what is the catalyst??

You can imagine a scenario where the company has basically no debt and if the FCF yield is still this high… well, companies have a way of solving that problem. That is the catalyst.

Here’s what they said on the call about a buyback – quite a change in tune from just all debt reduction commentary:

Stephen Michael Ferazani Sidoti & Company, LLC – Research Analyst

Great. Great. If I could just get one more in. You noted lower CapEx now expected. You’re down to 2x leverage, sounds like reasonable free cash flow this year. Any other thoughts on uses of cash given that leverage is probably down to an area you’re comfortable with?

Bradley J. Dodson Civeo Corporation – CEO, President & Director

It’s getting there. I think for our business, our target is to get to 1.5x levered. That being said, to your point, capital allocation decisions, have a little bit more freedom now and we will be assessing whether or not a share repurchase program is prudent, but that is on the to-do list for Q3.

I just really like the right tail on CVEO stock… I certainly make no bets on where commodities will go. But I am at least aware of where they are and where we likely are in the cycle (we’ve had a good 5 years of a downturn, now things have turned up). The stock is a 22% yield on pretty conservative numbers with the US also not contributing at all.


Lastly, you’ll recall part of the thesis was about a “forced seller.” I felt like his indiscriminate selling was pushing the stock down despite positive trajectory in the business. Isn’t it funny how his last reported sale was April 9th and now CVEO stock is moving higher?