ServiceMaster Global Holdings (SERV)
from 100% Letter
ServiceMaster Global Holdings (SERV) provides residential and commercial services that include termite and pest control, disaster response and restoration, cleaning, home inspections and home warranties. Last quarter, this home and business service provider beat earnings estimates by 12 cents. It will report fourth quarter and full-year 2014 results on February 26.
ServiceMaster came back to the public market via an IPO on June 25, 2014. But the company is actually quite old, with roots that date back to 1952. It was public in a previous life, but was taken private in 2007 by private equity firm Clayton, Dubilier & Rice (CD&R) in 2007.
This time around, ServiceMaster is a different company, having shed its ailing lawn care business, TruGreen. It spun off the struggling business at the end of 2013, essentially giving it to its previous owners, CD&R.
That transaction did two things: It meant ServiceMaster was able to retain some of the proceeds from the IPO and wasn’t saddled with a lot of debt (as is often the case when PE-backed companies go public). And the transaction freed ServiceMaster from TruGreen, a rather large business that wasn’t generating any profit.
When we exclude TruGreen, ServiceMaster generated a profit of $44 million ($0.48 per share) in the first nine months 2013, and $22 million ($0.20 per share) in the first nine months of 2014.
Catalyst #1: Preliminary Earnings Report Next Week. ServiceMaster will release preliminary unaudited fourth-quarter and full year 2014 financial results on Thursday, February 26, 2015. I’m expecting Q4 revenue of $575 million and adjusted EPS of $0.22.
Catalyst #2: Debt & Spending Reductions Mean Earnings Growth Potential above Expectations. ServiceMaster has been paying down debt with its free cash flow and IPO proceeds. Because of its improving debt profile and steady growth outlook, credit ratings agency Moody’s has recently upgraded ServiceMaster’s credit rating from “stable” to “positive”. Adjusted EPS in 2014 should be 20% higher, or more, than we were expecting just a few months ago. And that’s on the same revenue base.
Catalyst #3: More Acquisitions Likely To Come. In 2013 ServiceMaster spent $28 million on acquisitions. And in the first nine months of 2014 it spent an additional $57 million, including the $32 million acquisition of Home Security of America (HSA).
Given my estimate for adjusted EPS of $1.46 this year, the stock trades at 21.7 times this year’s earnings. Given that we don’t know enough yet to project earnings growth in 2015, we have to hold EPS growth flat. That means the stock trades at around 21-times next year’s earnings too.
We need management to give us the nod that EPS can and will grow in 2015. Based on how things are going, I think we’ll get it. We just need confirmation, and this will be another stock that just grinds higher month after month.
Buy half a position in ServiceMaster (SERV).
Tyler Laundon, The 100% Letter, 100percentletter.wyattresearch.com, 866-447-8625, February 18, 2015