New Stocks On Most Attractive And Most Dangerous Lists: March 2016

Most Dangerous Stock Feature: ABM Industries (ABM: $32/share)

ABM Industries (ABM), facility maintenance solutions provider, is one of the additions to our Most Dangerous stocks for March.

ABM Industries has been unable to turn its revenue growth into meaningful profits. Over the past decade, despite growing revenue by 6% compounded annually, ABM’s economic earnings have declined from -$15 million to -$52 million. Figure 2 has the details, including the sharp decline in economic earnings over the past four years.

Figure 2: ABM’s Declining Economic Earnings

NewConstructs_ABM_PoorEconomicProfits_2016-03-10

 

Sources: New Constructs, LLC and company filings

Over this same time, ABM’s ROIC has fallen from 6% to a bottom-quintile 3% while its NOPAT margin has followed a similar path, declining from 2% in 2005 to 1% in 2015.

Forensic Accounting Reveals Overstated EPS

In order to derive the true recurring cash flows, an accurate invested capital, and a real shareholder value, we made the following adjustments to ABM’s 2015 10-K:

Income Statement: we made $56 million of adjustments with a net effect of removing $12 million (<1% of revenue) in non-operating income. We removed $22 million in non-operating expense and $34 million in non-operating income.

Balance Sheet: we made $432 million of adjustments to calculate invested capital with a net increase of $296 million. The largest adjustment was the inclusion of $223 million related to off-balance sheet operating leases. This adjustment represented 14% of reported net assets.

Valuation: we made $408 million of adjustments that decrease shareholder value. There were no value increasing adjustments. The largest adjustment was the removal of $381 million in total debt, which includes $223 million in operating leases. This adjustment represents 21% of ABM’s market cap.

ABM Shares Have Room To Fall

While ABM’s fundamentals have been in clear deterioration, the stock is up 30% over the past five years. To justify its current price lf $32/share, ABM must grow NOPAT by 15% compounded annually for the next 18 years. Keep in mind that over the past decade, ABM has only grown NOPAT by only 3%, much lower than what the current stock price would imply.

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Disclosure: New Construct Staff receive no compensation to write about any specific stock, sector or theme.

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