On Nov 14, 2016, Zacks Investment Research downgraded ABM Industries Incorporated (ABM Quick QuoteABM - Free Report) to a Zacks Rank #3 (Hold). Going by the Zacks model, companies holding a Zacks Rank #3 have high chances of performing in line with the broader market in the quarters ahead.

Headquartered in San Francisco, CA, ABM Industries provides engineering, janitorial, parking, and facility solutions to commercial, industrial, institutional, and retail facilities. The company has developed a platform to deliver an end-to-end service model to its clients by realigning its operational structure to an on-site, mobile and on-demand market based structure. This realignment has improved its long-term growth prospects and provides higher margin opportunities by enabling it to better deliver end-to-end services to its clients across urban, suburban and rural areas. The company further expects to extend its global footprint and strengthen its position in existing markets through both inorganic and organic growth across the industry verticals.

The company has embarked on a Vision 2020 Plan that outlines its vision for the next five years. The plan hinges on three primary phases, the first of which is aimed to increase the efficiency of the company through diligent execution of the operating plan and stringent cost-reduction activities. The second phase will focus on driving growth across the realigned verticals through effective realization of the cost savings from procurement, account management and other organizational changes. The final phase of the transformation will include accelerated growth impetus from the vertical alignment and account planning systems with a continuous focus on additional cost savings.

ABM Industries’ strategy entails growth through strategic acquisitions and organic growth while maintaining desirable profit margins. The company has a healthy pipeline of future businesses with strength seen particularly in its government business. The company’s  comprehensive, strategic and transformative initiatives are focused on driving sustainable profitability by effectively allocating resources to higher margin services and business verticals with a strong competitive edge. Management also reiterated that corporate restructuring initiatives were well on track to yield sustained long-term growth momentum. ABM Industries has further updated its fiscal 2016 guidance and expects adjusted income from continuing operations in the range of $1.70–$1.75 per share, up from $1.55–$1.65 expected earlier. The increased guidance is primarily due to the recognition of certain discrete tax items and higher-than-expected 2020 Vision savings.

However, the company’s failure to make new acquisitions on a regular basis may hamper its growth rate. A slowdown in acquisition activity may not only lead to lower revenues, but also lower margins, as revenues associated with acquired operations generally have higher margins than new revenues through organic growth. Furthermore, an acquisition strategy is not without risks, as the integration process can at times be costly and disruptive to the normal course of business operations.

Given the low cost of entry into the facility services business, ABM faces intense competition from local and national players. Furthermore, the company faces indirect competition from building owners or tenants, who perform one or more of these services internally in order to cut costs, especially in the areas where external services are subject to sales tax. These strong competitive pressures could limit the company’s success rate in bidding for profitable businesses and its ability to increase prices in accordance with the rising costs.

We remain encouraged by the inherent growth potential of this stock. Some better-ranked stocks in the industry include Carbonite, Inc. , LogMeIn, Inc. and Rollins Inc. (ROL Quick QuoteROL - Free Report) . Rollins carries a Zacks Rank #2 (Buy), whereas Carbonite and LogMeIn sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Carbonite has a long-term earnings growth expectation of 30% and is currently trading at a forward P/E of 82.9x. Carbonite has a stellar earnings surprise history with an average positive earnings surprise of 235.1% in the trailing four quarters, comprehensively beating estimates in each quarter.

LogMeIn has a long-term earnings growth expectation of 22.5% and is currently trading at a forward P/E of 99.1x. LogMeIn has a healthy earnings surprise history with an average positive earnings surprise of 49.7% in the trailing four quarters, beating estimates in each quarter.

Rollins is currently trading at a forward P/E of 40.8x. The company has a modest earnings surprise history with an average positive earnings surprise of 2.9% in the trailing four quarters, beating estimates twice.

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