SERVICEMASTER GLOBAL HOLDINGS INC. $57(New York symbol SERV; Manufacturing sector; Shares outstanding: 135.4 million; Market cap: $7.7 billion; Takeover Target Rating: Medium; No dividends paid; www.servicemaster.com) has three divisions: Terminix (53% of its 2017 revenue, 49% of its earnings) sells termite and pest control services to 2.7 million customers in the U.S., Canada, Mexico and the Caribbean; American Home Shield (40%, 38%) sells home service plans that cover the repair costs of major appliances and major systems such as heating and cooling; and Franchise Services (7%, 13%) sells a variety of services to homeowners, such as cleaning, cabinet and wood furniture repair, home inspection and disaster restoration. The U.S. accounts for 98% of its total revenue.
ServiceMaster completed an initial public offering of 39.5 million shares at $17.00 a share on June 25, 2014.
ServiceMaster was founded in 1929 as a moth-proofing company; later added other services such as carpet cleaning
Terminix controls 21% of the U.S. pest control market
American Home Shield’s 75% customer retention rate cuts its risk
The company’s revenue rose 18.5%, from $2.5 billion in 2014 to $2.9 billion in 2017. Earnings jumped from $0.38 a share (or a total of $43 million) in 2014 to $1.19 a share (or $162 million) in 2015. Earnings fell to $1.13 a share (or $155 million) in 2016 due to a $23 million insurance-related charge. Earnings then jumped to $3.76 a share (or $509 million) in 2017.
If you factor out all unusual items, earnings per share rose 55.8%, from $1.13 in 2016 to $1.76 in 2017.
In the first quarter of 2018, ServiceMaster’s revenue rose 5.0%, to $675 million from $643 million a year earlier. That’s mainly due to strong gains at American Home Shield (up 9%) and Franchise Services (up 20%). Revenue at Terminix rose just 1% as colder-than-normal spring weather hurt demand for pest control treatments.
The company’s earnings in the quarter jumped 28.3%, to $59 million from $46 million. ServiceMaster’s per-share earnings gained 29.4%, to $0.44 from $0.34, on fewer shares outstanding.
The company ended the quarter with cash of $436 million; its long-term debt was $2.7 billion, or a somewhat high 33% of its market cap.
ServiceMaster now plans to spin off its American Home Shield business as a separate firm. In the 12 months ended March 31, 2018, that business had revenue of $1.2 billion and gross profits of $262 million.
The company has yet to reveal the terms of the transaction. However, investors will only be liable for capital gains taxes if or when they sell their new shares. ServiceMaster aims to complete the spinoff in the third quarter of fiscal 2018.
The remaining company will consist of the Terminix and Franchise Services businesses. It aims to spur its long-term growth by spending more on advertising.
Acquisitions will also play a role. For example, ServiceMaster recently purchased Copesan Services for $148 million. It sells pest control services to commercial clients.
ServiceMaster’s stock has gained 45% since the company first announced the spinoff in July 2017. However, it expects costs related to the split to be between $35 million and $45 million. In addition, the company will spend between $20 million and $30 million to replace computer systems that it currently shares with American Home Shield.
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