Over the past six months, ABM’s stock price fell to $49.06. Shareholders have lost 9.7% of their capital, which is disappointing considering the S&P 500 has climbed by 9.2%. This may have investors wondering how to approach the situation.

Is there a buying opportunity in ABM, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.

Why Do We Think ABM Will Underperform?

Despite the more favorable entry price, we don't have much confidence in ABM. Here are three reasons we avoid ABM and a stock we'd rather own.

1. Slow Organic Growth Suggests Waning Demand In Core Business

Investors interested in Industrial & Environmental Services companies should track organic revenue in addition to reported revenue. This metric gives visibility into ABM’s core business because it excludes one-time events such as mergers, acquisitions, and divestitures along with foreign currency fluctuations - non-fundamental factors that can manipulate the income statement.

Over the last two years, ABM’s organic revenue averaged 2.9% year-on-year growth. This performance was underwhelming and suggests it may need to improve its products, pricing, or go-to-market strategy, which can add an extra layer of complexity to its operations.

2. EPS Growth Has Stalled Over the Last Two Years

Although long-term earnings trends give us the big picture, we like to analyze EPS over a shorter period to see if we are missing a change in the business.

ABM’s flat EPS over the last two years was worse than its 3.4% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

3. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, ABM’s margin dropped by 8.3 percentage points over the last five years. Almost any movement in the wrong direction is undesirable because of its already low cash conversion. If the trend continues, it could signal it’s becoming a more capital-intensive business. ABM’s free cash flow margin for the trailing 12 months was breakeven.

Final Judgment

We see the value of companies helping their customers, but in the case of ABM, we’re out. Following the recent decline, the stock trades at 12.7× forward P/E (or $49.06 per share). While this valuation is reasonable, we don’t see a big opportunity at the moment. There are more exciting stocks to buy at the moment. We’d suggest looking at a dominant Aerospace business that has perfected its M&A strategy.

Stocks We Would Buy Instead of ABM

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