ABM Buys HHA Services

ABM Industries Incorporated ( ABM - Analyst Report ) recently completed the acquisition of HHA Services, a leading facility management and food provider to different communities. The financial details of the transaction were not disclosed.

Based in St. Clair Shores, Michigan, HHA Services provides food and facility management services to hospitals, health care systems, long-term care facilities and retirement communities. Its line of services encompasses environmental services, plant operations and maintenance as well as food and nutrition.

The acquisition will expand New York-based ABM Industries’ presence in the Michigan area. It will also fortify ABM Industries’ health care capabilities enabling it to reach to a wider customer base.

ABM Industries’ strategy entails growth through acquisitions. Earlier in October, the company announced that it has agreed to acquire Air Serv Corporation to expand its potential in the end-to-end needs of the airlines and airport authorities. ABM Industries will use its cash in hand (of nearly $158 million) to fund the acquisition.

ABM Industries’ third-quarter 2012 adjusted earnings of 37 cents per share fell short of the Zacks Consensus Estimate of 42 cents. Total revenues remained flat year over year at $1.08 billion and missed the Zacks Consensus Estimate of $1.09 billion.

As the company heavily depends on acquisitions for growth, its failure to make new acquisitions on a regular basis will inevitably impede its growth. 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 internal growth.

Moreover, dearth of government spending along with weak global economic conditions is expected to weigh on the margins moving forward. ABM Industries depends heavily on government contracts and, as such, any cancellation of these contracts will affect its revenues.

ABM Industries, which belongs to the business services industry, retains a Zacks #5 Rank (Strong Sell). Rollins Inc. ( ROL - Snapshot Report ) is a Zacks #2 Rank (Buy) stock in the same industry. We have a long-term Neutral recommendation for ABM Industries.