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Near-Term Outlook for Building Maintenance Services Stocks

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The building maintenance services industry offers a wide range of services including electrical, lighting, cleaning, repair, replacement, heating, ventilation, air-conditioning (HVAC), plumbing, landscaping and pest control among others.

While pest control and interior building cleaning are the fastest growing services, landscaping is at the core of this industry.

Here are the major themes in the industry:

  • Since the industry participants offer services that consumers generally cannot delay, revenues and cash flows remain fairly stable through the economic cycle. However, rising interest rates and trade conflicts could mar the industry’s near-term growth prospects. While steel and aluminum tariffs are leading to increase in material costs for building developers, rising interest rates are making funding for projects expensive. This headwinds for construction companies could reduce the demand for building maintenance services.
  • New residential construction starts, permits and completions have increased over the last five years at a moderate rate. This is because the aftereffects of the recession and resultant foreclosures led to an inventory glut that was hard to burn off at a reasonable rate. In terms of non-residential, strength in the economy has been driving demand for offices and commercial buildings, a trend that will likely continue in the near to mid-term.
  • Trump’s long-awaited $1.5-trillion infrastructure plan is likely to result in higher building and infrastructure spending in the near future. This could significantly boost revenues and profitability of building maintenance companies.

Zacks Industry Rank Indicates Gloomy Prospects

The Zacks Building Products - Maintenance Service Industry is part of the the broader Zacks Business Services Sector.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates underperformance in the near term.

It carries a Zacks Industry Rank #234, which places it at the bottom 9% of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

The trend in collective earnings estimate revisions of the constituent companies indicates a dismal earnings outlook for the industry, which, in turn, has placed it in the bottom 50%.

Our proprietary Heat Map shows that the industry’s rank has remained among the bottom 50% all through.

The sell-side analysts covering the companies in this industry have been steadily decreasing their estimates. Over the past year, the industry’s consensus earnings estimate for the current year has declined around 23%.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock market performance and current valuation.

Industry Outperforms Sector and S&P 500

The Zacks Building Products - Maintenance Service Industryhasoutpaced the broader Zacks Business Services Sector as well as the Zacks S&P 500 composite over the past year.

The industry has rallied 9.2% over this period compared with the S&P 500 composite and broader sector’s rise of 6.2% and 8.9%, respectively.

One-Year Price Performance

Industry’s Current Valuation

Comparing the industry with the Zacks S&P 500 composite on the basis of trailing 12-month price-to-earnings (P/E) ratio, which is a commonly used multiple for the industry, we see that the industry trades at 34.27X, higher than the S&P 500’s 18.74X. It is also ahead of the sector’s 25.77X.

The ratio is below the five-year high of 39.91X but above the median level of 28.37X and low level of 24.26X.

Price-to-Earnings (P/E) Ratio TTM

Bottom Line

Robust construction activity in both residential and non-residential sectors along with strong technological advancement is driving demand for building maintenance services.

However, rising interest rates, trade war anxieties, labor shortages, apprehension of one more hike in 2018 and limited land availability remain overhangs for the industry.

None of the stocks in the Zacks Building Products - Maintenance Service space currently holds a Zacks Rank #1 (Strong Buy) or Zacks Rank #2 (Buy). Below, we have mentioned three stocks from the industry, which we believe investors should retain in their portfolio, as they carry a Zacks Rank #3 (Hold).

Team, Inc. (TISI - Free Report) : The stock of this Texas-based provider of specialty industrial services has gained 29.1% year to date. The Zacks Consensus Estimate for current year EPS has remained unchanged at a loss of $1.06 in the past 60 days.

You can see the complete list of today’s Zacks #1 Rank stocks here.

ABM Industries Incorporated (ABM - Free Report) : The stock of this New York-based provider of integrated facility solutions has declined 19% year to date. The Zacks Consensus Estimate for current year EPS has improved 2.2% in the past 60 days.

Limbach Holdings, Inc. (LMB - Free Report) : The stock of this Pennsylvania-based provider of commercial specialty contract services has declined 32.6% year to date. The Zacks Consensus Estimate for current year EPS has remained unchanged at 41 cents in the past 60 days.

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