Third Avenue Management Comments on ABM Industries
Shares of ABM have languished over the last two years in the wake of an ill-timed acquisition by the company – in December 2010 ABM bought another building-maintenance specialist named The Linc Group, a contractor whose business included the management of barracks in Iraq for the U.S. Government. With the swift withdrawal of U.S. troops in 2011 Linc's Iraq business has largely disappeared. Even so, Linc accounts for only about 12% of ABM's sales and the lost Iraq business was only 2% of ABM's total revenue by our estimates. We believe the untimely acquisition has helped afford us a rare opportunity to invest in a very strong company at attractive prices (around 7.5 times estimated EBITDA1 for this year). Ultimately, ABM still exhibits many of the elements we look for in our search for high-quality companies:
Stability: While periods of soft economic conditions will certainly pressure ABM's sales and profitability, the impact is unusually benign owing to the largely non-discretionary nature of its services, bolstered by long-term, cost-plus customer contracts. We believe ABM's services face minimal obsolescence risk over the long term and that the company's resilient performance during the recent recession (no step-back in earnings) demonstrates its staying power and the necessity of its services
Growth: ABM has long enjoyed a trend towards outsourced facilities management and continues to do so, particularly within the engineering services space. ABM also stands to take or acquire market share from competitors given the facilities management industry remains very fragmented despite ongoing consolidation. In the case of Linc, the acquisition significantly strengthened ABM's engineering offerings and, thus, the potential for outsized growth from 'bundled' services solutions, e.g., providing integrated janitorial and engineering services for a building. Lastly
ABM generally stands to benefit from the ongoing recovery of the U.S. economy and resultant improvements in office and hotel occupancy rates.
•Financial position: ABM enjoys a strong financial position, as Management has firmly committed to keeping the company's debt level modest2. Combined with the manageable reinvestment needs of the business and its very stable generation of free cash flow, this conservatism has afforded ABM the important flexibility to pursue attractive acquisition opportunities and consistently pay and grow its dividend3.
•Management: ABM's management team is very experienced in the business, with the majority having very long tenures with the company. On the whole, management appears to have done a good job identifying and integrating the numerous acquisitions completed by ABM over the years without assuming compromising levels of debt. Management also enjoys a reputation for being good operators and disciplined around the pricing of contracts.
•Resource conversion: With the ongoing consolidation across the industry and the stable business model seemingly attractive to private equity investors, the facilities management industry has seen a considerable number of ABM's peers taken private over the years. As such, we believe there is a possibility ABM could be acquired at some point. Based on the valuations of prior industry transactions, shares of ABM could command an acquisition price substantially higher than today's prices.
From Third Avenue's first quarter 2013 commentary.