Executive Summary / Key Takeaways

• ABM Industries is executing a deliberate strategic transformation through its ELEVATE strategy, making near-term margin sacrifices in Business & Industry (B&I) and Manufacturing & Distribution (M&D) to secure long-term contract renewals and penetrate high-growth verticals, creating a potential inflection point as these investments mature.

• The company's Technical Solutions segment is emerging as a hidden gem, with microgrid and data center services growing at 2.5x year-over-year and benefiting from secular tailwinds that could more than double the U.S. microgrid market by 2030, positioning ABM at the center of electrification and AI infrastructure buildout.

• Despite commercial office market headwinds, ABM's B&I segment has returned to positive organic growth while competitors report meaningful declines, demonstrating resilient market share and pricing power in Class A properties that will benefit disproportionately as prime vacancy rates decline from 14.5% to 13.6% by year-end.

• A company-wide restructuring program launching in Q4 2025 will generate $35 million in annual run-rate savings by early 2026, directly offsetting current margin pressures while the ERP implementation—though temporarily disrupting cash flow—will drive permanent cost efficiencies and real-time analytics once normalized in Q4.

• Trading at $43.92 with a 9.27x EV/EBITDA multiple and 2.45% dividend yield, ABM offers a compelling risk/reward profile where the market appears to be pricing in near-term headwinds while underappreciating the earnings power of completed technology investments and the high-growth Technical Solutions segment.

Setting the Scene: The Evolution of a 115-Year-Old Facility Services Leader

ABM Industries Incorporated, founded in 1909 and headquartered in New York, has evolved from a modest cleaning services provider into a leading integrated facility solutions company serving diverse end markets. The business model generates revenue through long-term contracts structured as monthly fixed-price, square-foot, cost-plus, and transaction-based arrangements, creating a recurring revenue foundation that exceeds 90% of total sales. This contractual stability provides defensive characteristics, but the real story lies in how ABM is repositioning itself from a traditional janitorial provider into a tech-enabled solution provider at the forefront of electrification and AI-driven facility optimization.

The facility services industry operates as a fragmented oligopoly where scale, client relationships, and specialized capabilities determine competitive positioning. ABM competes against global real estate services giants like CBRE Group (CBRE) (40.8% market share) and Jones Lang LaSalle (JLL) (26.2%), as well as specialized providers like Aramark (ARMK) (19.2%) and technical services leader EMCOR (EME). Unlike these competitors, ABM has deliberately chosen a path of end-market diversification, maintaining leadership positions in aviation, education, and emerging high-growth sectors like microgrids and data centers. This diversification insulates the company from single-market cyclicality while creating cross-selling opportunities through its Technical Solutions segment.

Three secular trends are reshaping ABM's addressable market. First, the commercial office market is experiencing a "flight to quality" as tenants concentrate in Class A properties, with CBRE projecting prime vacancy rates to decline from 14.5% to 13.6% by year-end. Second, the reshoring of manufacturing—concentrated in semiconductors, pharmaceuticals, and automotive—is driving demand for integrated facility services in complex industrial environments. Third, the proliferation of AI and data centers is creating exponential growth in power demand, with the U.S. microgrid market projected to more than double by 2030 and global data center capacity expanding at double-digit rates. ABM's strategic positioning across these trends creates multiple levers for organic growth.

Technology, Products, and Strategic Differentiation: The ELEVATE Transformation

ABM's multiyear ELEVATE strategy, launched in December 2021, represents a fundamental reimagining of how facility services are delivered. The company is investing $200-215 million over the program's life to enhance client experience through innovative multiservice solutions, improve team member experience through workforce management tools, and deploy technology and data analytics at scale. This isn't merely a digital overlay on traditional services; it's a complete re-architecture of ABM's operating model that will create durable competitive advantages once fully implemented.

The cornerstone of this transformation is the ERP system rollout, which completed its final phase in Q1 2025 with Business & Industry and Manufacturing & Distribution segments transitioning to the new cloud-based platform. While this temporarily impacted cash flow—causing negative $123 million free cash flow in Q1 due to invoice-by-invoice quality reviews—the strategic rationale is compelling. The new system provides enhanced transactional processing, improved internal controls, and real-time analytics that will drive cost efficiencies and improve synergy capture across segments. Management's decision to delay invoicing rather than risk errors demonstrates a commitment to long-term client relationships over short-term financial metrics, a choice that will pay dividends as the system normalizes in Q4 2025.

ABM's AI investments, while still nascent, represent a potentially underappreciated catalyst. The company has commercialized ABM Clean and ABM Performance Solutions, AI-based offerings deployed across more than 10 airports, and introduced a workforce productivity optimization tool that contributed to nearly 1% reduction in labor as a percent of revenue in Q4 2024. These tools enable predictive maintenance, optimize cleaning schedules based on real-time usage data, and improve labor allocation across facilities. As CEO Scott Salmirs noted, "AI is probably the most exciting thing that's happening here," with real meaningful impact expected between 2026-2028. Importantly, ABM's core people-led services are insulated from full automation, but AI will drive significant back-office efficiencies and margin expansion.

The Technical Solutions segment embodies ABM's technology-enabled future. With nearly 60% of segment revenue now derived from electrification business—including microgrids, data centers, and power services—ABM has positioned itself at the nexus of energy transition and digital infrastructure. The acquisition of RavenVolt in 2022 and Quality Uptime Services in 2024 provides turnkey capabilities in uninterrupted power supply systems and power distribution units, services that are increasingly critical as organizations grapple with grid fragility and surging energy consumption from AI proliferation. The segment's $700 million backlog represents a historic high, providing visibility into sustained double-digit growth.

Financial Performance & Segment Dynamics: Margin Pressure Masks Underlying Strength

ABM's Q3 2025 results reveal a company in transition, with consolidated revenue growing 6.2% to $2.2 billion and organic growth reaching 5.0%—the highest since Q4 2022. However, gross margin compressed 23 basis points to 12.3% due to strategic pricing decisions in B&I and M&D, while operating profit margin declined to 3.75% from 4.92% at CBRE and 4.38% at JLL. This margin pressure is intentional, not indicative of competitive weakness, and understanding the segment-level dynamics reveals why.

Business & Industry: Strategic Pricing for Market Share Gains

B&I revenue grew 2.8% in Q3 to $1.04 billion, returning to positive organic growth after quarters of decline. This outperformance versus peers reporting "meaningful organic revenue declines" validates ABM's strategy of proactive contract extensions and strategic pricing decisions. Management explicitly chose to accept margin compression—operating profit margin fell to 7.1% from 7.7%—to protect long-term client relationships in slower-recovering commercial office markets, particularly in select West Coast, Midwest, and Mid-Atlantic metro areas.

The "why" behind this decision is crucial. As Scott Salmirs explained, "When we talk about not wanting something to go to market, for us, it's just a very different conversation when you're sitting down with a client and working with them in a collaborative way to come to a result that they want versus going out to bid and potentially having someone put in an irresponsible bid." This approach secured multi-year extensions with major investment banks in New York City and top technology firms, locking in revenue streams that will benefit from escalating lease rates as prime office markets tighten. The temporary 40-120 basis point margin sacrifice creates a multi-year competitive moat.

Manufacturing & Distribution: Investing in High-Growth Verticals

M&D delivered 8.4% revenue growth in Q3 to $409 million, driven by new contract wins and client expansions in semiconductor, pharmaceutical, and automotive manufacturing. However, operating profit margin compressed to 8.9% from 10.9% as ABM strategically bid below normal minimums to gain entry into high-growth verticals. This is classic land-and-expand strategy: secure footholds in reshoring facilities, then cross-sell higher-margin ancillary services like material handling and test and balancing.

The segment's momentum stems from three drivers: technology investments spurred by AI solutions, e-commerce growth requiring sophisticated distribution facilities, and over $450 billion in private semiconductor investments announced since 2020. ABM's ability to speak the language of manufacturing clients—deploying subject matter experts who understand semiconductor cleanrooms and automotive production lines—creates differentiation that pure-play janitorial competitors cannot match. The margin compression is temporary; as these relationships mature and higher-margin services are layered in, M&D margins should return to the high-single-digit range.

Aviation: Consistent Outperformance

Aviation continues its multi-year streak of organic growth, with Q3 revenue up 8.7% to $292 million and operating profit margin expanding to 6.8% from 6.6%. The segment benefits from TSA checkpoint screenings averaging above 2.8 million daily in July and August, airport reinvestment programs like O'Hare's Global Concourse, and ABM's differentiated ABM Connect technology platform. New wins including a $25 million contract at Miami International Airport and a large cabin cleaning contract at Dallas-Fort Worth demonstrate the company's ability to capture market share in a growing market.

What makes Aviation resilient is that even incremental demand shifts don't significantly change ABM's scope of work. Planes must be cleaned, passengers assisted, and facilities maintained regardless of minor traffic fluctuations. This operational leverage, combined with technology differentiation, positions Aviation to continue its record-breaking performance with North American passenger traffic forecasted to grow 5.6% in 2025.

Technical Solutions: The Growth Engine

Technical Solutions is ABM's crown jewel, growing 19% in Q3 to $250 million with 6.8% organic growth and 12.2% acquisition contribution. The segment's operating profit rose 9% to $19.4 million, though margin compressed to 7.8% from 8.5% due to business mix and higher amortization costs. This margin volatility is typical for project-based technical services and should not obscure the underlying strength.

The segment's electrification business now accounts for nearly 60% of revenue, positioning ABM to capture the microgrid market's projected doubling by 2030 and data center capacity's double-digit expansion. The $700 million backlog provides revenue visibility unmatched in ABM's other segments. Management expects Q4 margins to rebound to the 11-13% range seen in prior years, driven by project completions and favorable mix. This seasonal pattern, combined with the secular tailwinds, makes Technical Solutions the primary driver of ABM's earnings growth in 2026 and beyond.

Education: Stable Cash Generation

Education remains the steady "GDP grower," with Q3 revenue up 3% to $235 million and operating margin expanding 110 basis points to 9.0% through improved labor efficiencies. The segment's resilience comes from stable K-12 and higher education funding, with institutions focusing on modernizing existing campuses rather than new construction. While not a growth driver, Education provides reliable cash flow and serves as a foundation for cross-selling integrated APS (multiservice) offerings that increase client stickiness.

Outlook, Management Guidance, and Execution Risk

Management has guided toward the low end of its prior adjusted EPS range of $3.65-$3.80 for fiscal 2025, with adjusted EBITDA margin expected between 6.3% and 6.5%. This revision reflects higher interest expense from increased borrowings to fund working capital during the ERP transition and the $75 million RavenVolt contingent consideration payment. However, the underlying operational trajectory is improving, with Q4 expected to show "meaningful" earnings and margin improvement driven by restructuring benefits and strong Technical Solutions performance.

The restructuring program launched in August 2025 will generate $35 million in annual run-rate savings by early 2026, directly addressing the margin compression seen in B&I and M&D. This is not a desperate cost-cutting measure but a strategic reorganization to streamline support functions and improve efficiency. The $10 million charge in Q4 2025 will be more than offset by savings in 2026, creating a clear path to margin expansion.

ERP normalization is the other key catalyst. Free cash flow improved from negative $123 million in Q1 to $150 million in Q3, with Days Sales Outstanding down 7% sequentially. Management anticipates "full normalization in the fourth quarter," which will unlock working capital and improve cash conversion. Once fully operational, the ERP system will provide real-time analytics enabling proactive client management and cost optimization, benefits that will compound over time.

The Technical Solutions segment's Q4 outlook is particularly compelling. Historically, Q4 margins have reached 11-13% due to project completions and favorable seasonality. With backlog at record levels and the microgrid business "super optimistic" according to management, this seasonal strength could drive a significant earnings beat in Q4, validating the segment's strategic importance.

Risks and Asymmetries: What Could Break the Thesis

The primary risk to ABM's investment thesis is a slower-than-expected recovery in commercial office markets. While prime vacancy rates are projected to decline, certain West Coast, Midwest, and Mid-Atlantic metro areas are recovering slower, and hybrid work models continue to pressure space utilization. If these markets remain depressed beyond 2026, the strategic pricing decisions that compressed B&I margins will have been made for limited long-term benefit. The mitigating factor is ABM's focus on Class A urban properties, which are outperforming the broader market with 2 million square feet of positive net absorption.

ERP execution risk remains material despite Q3 improvements. The company has experienced changes in internal control over financial reporting during implementation, and any system failures or data integrity issues could disrupt operations and client relationships. However, the hyper-care approach and invoice-by-invoice reviews that caused temporary cash flow pain demonstrate management's risk-aware implementation strategy, reducing the probability of catastrophic failure.

Labor cost inflation and availability present ongoing challenges. As a people-intensive business, ABM faces wage pressure and potential shortages of qualified workers. While management expresses confidence in adapting to policy shifts, the company's ability to pass through cost increases is not guaranteed, particularly in the strategically priced B&I and M&D contracts. The workforce productivity optimization tool provides some mitigation, but labor remains a structural vulnerability versus less people-intensive competitors.

Contingent consideration payments for acquisitions create cash flow uncertainty. The RavenVolt deal includes up to $280 million in potential payments, with $75 million paid in Q3 2025 and $34.1 million remaining on the balance sheet. If Technical Solutions achieves aggressive EBITDA targets, these payments could reach $130 million in 2026, temporarily impacting free cash flow despite representing success in the underlying business.

On the positive side, several asymmetries could drive upside beyond current guidance. Faster-than-expected commercial office recovery would accelerate B&I margin expansion. Larger-than-anticipated microgrid projects could drive Technical Solutions growth well above the 20% rate. Successful AI deployment could create new revenue streams and margin expansion that are not currently modeled. The $233 million share repurchase authorization provides downside protection and signals management's confidence in intrinsic value.

Valuation Context: Pricing in Headwinds, Ignoring Tailwinds

At $43.92 per share, ABM trades at a market capitalization of $2.73 billion and an enterprise value of $4.30 billion, representing 0.50x enterprise value to revenue and 9.27x enterprise value to EBITDA. These multiples represent a significant discount to direct competitors: CBRE trades at 1.43x EV/Revenue and 21.18x EV/EBITDA, while JLL trades at 0.74x EV/Revenue and 13.27x EV/EBITDA. Even Aramark, with its food services exposure, commands 0.81x EV/Revenue.

The discount reflects ABM's lower operating margins—3.75% versus CBRE's 4.92% and JLL's 4.38%—and its smaller scale. However, ABM's 2.45% dividend yield with an 18% recent increase and 55.14% payout ratio demonstrates commitment to shareholder returns and confidence in cash flow stability. The company's net debt to EBITDA ratio of 2.6x sits within its target 2.5-3.0x range, providing financial flexibility for acquisitions and investments.

From a cash flow perspective, ABM trades at 20.79x price to operating cash flow and 47.09x price to free cash flow, reflecting the temporary impact of ERP transition and working capital build. These multiples should compress significantly as cash flow normalizes in Q4 and restructuring savings flow through in 2026. The stock appears to be pricing in current margin pressures while underappreciating the earnings power of a fully integrated ERP system, normalized working capital, and the high-growth Technical Solutions segment.

Historical context suggests ABM typically trades at 0.4-0.6x EV/Revenue during periods of margin compression, expanding to 0.7-0.9x as margins recover. With the restructuring program targeting $35 million in savings and Technical Solutions driving margin expansion, ABM appears positioned for multiple expansion as the transformation story gains traction.

Conclusion: Transformation Creates Compelling Asymmetry

ABM Industries is executing a classic strategic transformation: accepting near-term margin pressure to secure long-term market position while investing in technology and high-growth segments. The company's resilience in commercial office markets—growing while competitors decline—demonstrates that strategic pricing decisions are building durable client relationships. The Technical Solutions segment, with its microgrid and data center exposure, provides a high-growth engine that is underappreciated by the market.

The investment thesis hinges on two variables: the speed of commercial office market recovery and the successful normalization of the ERP system. Both appear to be trending positively, with prime vacancy rates declining and Q3 free cash flow already rebounding to $150 million. The $35 million restructuring program provides a clear path to margin expansion in 2026, while the AI investments could create additional upside beyond current guidance.

Trading at a significant discount to peers while offering a 2.45% dividend yield and exposure to secular trends in electrification and AI infrastructure, ABM presents an asymmetric risk/reward profile. The market has priced in the near-term headwinds but appears to be discounting the earnings power of a transformed, technology-enabled facility services platform. For patient investors, the combination of strategic positioning, financial flexibility, and underappreciated growth drivers creates a compelling opportunity as ABM's ELEVATE strategy reaches its inflection point.