Investor Essentials Daily

This company poised to benefit from the eventual commercial real estate recovery

January 23, 2024

The commercial real estate industry faced challenges due to the pandemic and economic uncertainties, causing a decline in occupancy rates and valuations.

However, ABM Industries (ABM), a leading provider of facility solutions, capitalized on this situation.

The recovery of commercial buildings post-pandemic benefited ABM, and disruptions allowed them to consolidate the fragmented facility solutions industry through acquisitions.

ABM’s effective strategy and adaptability during the pandemic have resulted in strong profitability and growth.

Despite its potential, the market underestimates ABM’s future performance.

ABM is positioned to continue delivering steady returns as the commercial real estate sector recovers, taking advantage of the sector’s pessimism to enhance shareholder value.

Thus, ABM showed up on our screen. The company makes a great FA Alpha 50 name due to its potential for high returns and low expectations from the market.

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There has been a lot of pessimism around commercial real estate in recent years.

First, it was the pandemic. People stopped going to offices for work and stores for shopping. Everything became online nearly overnight. This led to a sharp decline in occupancy rates of commercial buildings like offices and retail spaces.

Secondly, the concerns around a recession and uncertainties over consumers’ spending power and strength dragged valuations of commercial real estate and anything related down.

This pessimism around the commercial real estate industry creates opportunities for some companies, one of them being ABM Industries (ABM).

ABM is a leading provider of facility solutions, offering janitorial, electrical, landscaping, and parking services primarily to commercial buildings.

As commercial buildings are one of the major end markets for ABM, the recovery of these end markets post-pandemic allowed the firm to benefit. Occupancy rates in offices and retail spaces have been steadily increasing over the last 12-18 months.

Additionally, the pandemic-induced disruptions created opportunities for ABM to consolidate the highly fragmented facility solutions industry.

The company has made several acquisitions in the recent past to strengthen its service offerings and expand its geographic footprint.

This strategy of consolidation has helped ABM garner a strong Uniform Return on Assets (ROA) of 26% and asset growth of 31

Take a look…

The company has shown resilience and adaptability in changing market conditions through the pandemic, indicating potential for steady earnings growth going forward.

ABM was able to quickly adapt its service models to meet the new requirements during the peak pandemic times. This demonstrates the management’s ability to navigate challenges, which provides confidence in ABM’s ability to deliver equity upside.

However, the market fails to recognize the company’s potential.

We can see this through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market predicts that the company’s Uniform ROA will fall to 27%, a far cry from the 36% peak in 2022.

ABM’s resilient business model and ability to adapt quickly to changing market requirements have instilled confidence among investors about its long-term potential.

While macro headwinds persist, the company is well-positioned to continue delivering steady cash flows and total returns for shareholders as the commercial real estate recovery gains momentum.

Overall, the pessimism around the sector has opened up new opportunities for facility services outsourcers like ABM to drive consolidation in a fragmented industry and enhance shareholder value.

Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.

Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”

Investors who neglect the very real issues with as-reported accounting can find themselves caught up in investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.

The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.

The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.

That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.

This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.

See for yourself below.

To see the other 49 names on the list, click

Best regards,

Joel Litman & Rob Spivey

Chief Investment Strategist &
Director of Research
at Valens Research

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