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					Buy Report
Ricardo Vielledent & LaurenCastro

Recommendation: Buy, Half Position approx. 1,000 shares     
Consistent profitability show strong potential for future earnings Strong position in its industry and in its 5 Business segments Favorable outlook for 2007 Undervalued in our multiple valuations, and slightly undervalued in our DCF analysis Strong Financials with no LT Debt eliminating financial risk At a Glance: Ticket: ABM Exchange: NYSE Sector: Industrials Industry: Business Services Market Cap: $1.25 Billion Avg. Volume: 257,634 52-Week High: $26.30 52-Week Low: $16.11 Current Price (2/2): $25.74 Beta:0.80 EPS (ttm):1.88 P/E (ttm): 13.72 P/B (mrq): 2.35 P/S (ttm): 0.47 PEG: 2.41

Recent Company News
January 8, 2007: ABM Industries Inc names new President for Security Business December 12, 2006: ABM Industries Inc. authorizes buyback of up to two million shares of company stock. December 12, 2006: ABM raises quarterly dividend by 9.1%. November 21, 2006: ABM is ranked among the top 25 California companies with large percentage of women executives. September 6, 2006: ABM continues best-ever quarterly dividend rate August 15, 2006: ABM announces resolution of World Trade Center Insurance Litigation – ABM to receive $80.0 million for Business Interruption Insurance Claims. August 15, 2006: AMPCO System Parking Awarded Contract with Sacramento Airport June 26, 2006: ABM Janitorial Services Awarded Contract Renewal with Salt River Project June 9, 2006: ABM names new President for AMPCO System Parking May 10, 2006: Ampco System Parking Awarded Contract with the City of Minneapolis March 29, 2006: ABM authorizes buyback of up to two million shares of company stock.

Table of Contents Company Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . …….……. . . 1 Company Profile and Operating segments . . . . . . . . . . . . . . . . . . . . . . . . . . . …………. . . . . 3-5 Company History ………………………………………………………………………….… 5-6 Industry Overview and Competitive Landscape……..………………………………...……. 7 Competitors…………………………………………………………………………………… 8 Financial Ratios………………………………………………………………………………. 9-10 Extended DuPont Model……………………………………………………………………… 11 Multiple Valuations…………………………………………………………………………… 12-13 ProForma Income Statement.…………………………………………………………………. 14 DCF Analysis…………………………………………………………………………………...15-16 Analysts’ Coverage/Opinion……………………………………………………………………16 Investor Relations/ Recommendation……………….…………………………………………..17 Balance Sheet……………………………………………………………………………………18 Income Statement………………………………………………………………………………..19 Value Line………………………………………………………………………………………. 20


Company Profile1
ABM Industries Incorporated (ABM) is a leading facility service contractor for commercial, industrial, institutional and retail facilities. Headquartered in San Francisco California, ABM was reincorporated in Delaware on March 19, 1985 as the successor to a one-man window washing business founded in California in 1909. They currently operate in a number of cities throughout the United States and in British Columbia, Canada. Because of ABM’s prodigious number of employees (more than 75,000), the range of services performed, and its geographical infrastructure, the company has become a leader in outsourced facility maintenance and operations services in the United States. Effective October 1, 2006, International Business Machine (IBM) provides the Company with substantially all of the information technology infrastructure and services. During the fiscal year ended October 30, 2006, the Company acquired substantially all of the operating assets of MWS Management, Inc., dba Protector Security Services and Fargo Security, Inc., both security guard services companies, and Brandywine Building Services, Inc., a facility services company.

Operating Segments
ABM conducts its business through a number of subsidiaries, which are grouped into five segments based on the type of the business operations they perform. As of October 31, 2006 the five segments were:

◙ Janitorial. The Company’s Janitorial services subsidiaries operate primarily under the names ―ABM Janitorial Services,‖ and ―American Building Maintenance.‖ Janitorial services include floor cleaning and finishing, window washing, furniture polishing, carpet cleaning and dusting, as well as other building cleaning services. These are provided for a variety of facilities such as commercial office buildings, industrial plants, financial institutions, retail stores, shopping centers, warehouses, stadiums and arenas, airport terminals, etc. The Company’s Janitorial subsidiaries maintain 111 offices and operate in 48 states, the District of Columbia and one Canadian Province.

◙ Parking. The Company’s Parking services subsidiaries operate primarily under the names ―Ampco System Parking,‖ ―Ampco System Airport Parking,‖ and ―Ampco Express Airport Parking.‖ The Company’s Parking subsidiaries maintain 27 offices and operate in 28 states. They operate over 770,000 parking spaces throughout the United States—off-airport parking and approximately 1,600 parking lots and garages in airports. The company also holds 17 parking shuttle bus service contracts


2006 ABM 10K


◙ Security. The Company’s Security services subsidiaries operate primarily under the names ―American Commercial Security Services‖ and ―Silverhawk Security Specialists.‖ They provide security officers; investigative services; electronic monitoring of fire, life safety systems and access control devices; and security consulting services to a wide range of businesses. Subsidiaries maintain 61 offices and operate in 34 states and the District of Columbia.

◙ Engineering. The Company’s Engineering services subsidiaries operate primarily under the name ―ABM Engineering Services,‖ a wholly owned subsidiary that has maintained ISO Certification since 1999—a quality standard comprised of a rigorous set of guidelines and good business practices. It is the only national engineering services provider of on-site operating engineers to earn this prestigious designation. The company provides facilities with on-site engineers to operate and maintain mechanical, electrical and plumbing systems designed to maintain equipment at optimal efficiency for customers. Subsidiaries maintain 16 branches and operate in 40 states and the District of Columbia.

◙ Lighting. The Company’s Lighting services subsidiaries operate primarily under the name ―Amtech Lighting Services.‖ They provide relamping, fixture cleaning, energy retrofits and lighting maintenance to a variety of commercial, industrial and retail facilities—the Company also repairs and maintains electrical outdoor signage and provides electrical services and repairs. Subsidiaries maintain 27 offices and operate in 50 states and the District of Columbia.


2006 Revenue By Segment
Lighting 4.17% Engineering 10.52%

Corporate 0.10%

Security 11.35%

Janitorial 57.64%

Janitorial Parking Security Engineering Lighting Corporate

Parking 16.22%

As shown by the graph above, during the 2006 fiscal year ABM received most of its revenue from the Janitorial segment, which generates over half of the revenue of the entire company. Parking follows in second place with the Security and Engineering segments following closely behind. ABM’s lighting and corporate segments generate the least amount of the company’s revenue. Although the numbers above are only representative of the 2006 fiscal year, they have followed similar trends throughout the years.

Company History2
1909: The company that in 1994 will become ABM Industries Incorporated is founded in San Francisco as a one-man window washing business by Morris Rosenberg. 1927: By acquiring Easterday Janitorial Supply Company of Los Angeles, San Francisco and Portland, the Company provides both janitorial services and supplies to its customers. 1962: American Building Maintenance Industries formed to become a publicly-held company. Ted Rosenberg is named the first Chairman of the Board. 1965: The stock of the Company is listed on the American Stock Exchange. The company pays its first dividend, a trend that continues to this day.


1967: Ampco Auto Parks, which will become Ampco System Parking in 1993, becomes the newest Division of the Company. 1968: The Company adds a Mechanical Services Division by acquiring Commercial Air Conditioning of Northern California and American Air Conditioning of Los Angeles. 1972: The stock of the Company is listed on the New York Stock Exchange. The Company adds a Lighting Division to its growing Family of Services. 1991: The Company establishes ABM Engineering Services as a full-fledged Division. 1994: To reflect the diversification of American Building Maintenance Industries into facility services other than building maintenance (such as parking and security services) the Company's name is changed to ABM Industries Incorporated, which is abbreviated to ABM Industries, Inc. 1997: ABM Industries acquires the Janitorial and Engineering Services from Ogden Corporation. 1999: Amtech Lighting Services is named "Green Lights Ally of the Year" by the U.S. Environmental Protection Agency for outstanding energy efficiency initiatives, and ABM Engineering Services receives ISO 9002 certification, which is the most prestigious recognition of quality assurance worldwide. 2001: Seventeen employees of the ABM Family of Services are fatally injured in the terrorist attacks at the World Trade Center in New York City on September 11th. ABM divests the operations of its Easterday Janitorial Supply subsidiary to AmSan West, Inc. 2002: ABM aquires Lakeside Building Maintenance Inc, of Chicago, the largest acquisition in ABM history. 2004: ABM acquires Los Angeles based Sentinel Guard Systems. ABM acquires Colin Service System, Inc., a facility services company based in New York. ABM acquires northeastern U.S. janitorial operations of Initial Cleaning Services. ABM acquires Security Services of America. 2005: ABM subsidiary, Security Services of America (SSA), acquires Amguard Security and Patrol Services, based in Germantown, Maryland. ABM sells substantially all of the operating assets of its wholly owned subsidiary, CommAir Mechanical Services, to Carrier Corporation ABM acquires the commercial janitorial cleaning operations in Baltimore, Maryland of the Northeast U.S. Division of Initial Contract Services, Inc. ABM acquires the customer contracts of Brandywine Building Services, Inc., of Wilmington, Delware


Industry Overview
ABM Industries is part of the Industrials sector and is in the Business Services industry. It is also in the Environmental & Facilities Services sub-industry. This industry comprises establishments primarily engaged in providing staff to perform a combination of support services within a client's facilities. Establishments in this industry typically provide a combination of services, such as janitorial; maintenance; trash disposal; guard and security; mail routing reception; laundry; and related services to support operations within facilities. The industry has a positive outlook for 2007 with earnings growth expected to be at least 10%. In 2006 the Environmental & Facilities Services sub-industry rose 20.9% compared to a 13.3% rise for the S&P 1500 Index. It is however a mature industry with high competition which is thus leading to price erosion and could affect ABM Industries negatively. To offset this, there has been an increasing trend in the enhancement of customer services in an effort to retain market share by many companies in this industry. Furthermore there is a developing trend towards outsourcing by companies seeking to cut expenses therefore, increasing demand for ABM services according to Value Line. Overall, the industry has a positive overview, and ABM Industries has the potential to capitalize on these positive trends.

Competitive Landscape3
ABM is part of a highly competitive industry whose competition is based primarily on price and quality of service. The company competes with operating divisions of a few large, diversified facility services and manufacturing companies on a national basis, but their biggest competition comes from large numbers of mostly regional and local owner-operated companies. These result from the low cost to entry of to the facility services business and are located in major cities throughout the United States and in British Columbia, Canada; with particularly intense competition in the janitorial business in the Southeast and South Central regions of the United States. Indirectly, the Company competes with building owners and tenants that can perform internally one or more of the services provided by the Company. These building owners and tenants might have a competitive advantage when the Company’s services are subject to sales tax and internal operations are not. Furthermore, competitors may have lower costs because privately owned companies operating in a limited geographic area may have significantly lower labor and overhead costs. These strong competitive pressures could inhibit the Company’s ability to increase prices even as costs rise, thereby reducing margins.


2006 ABM 10K


Central Parking Corporation (CPC) Market Cap: 651.90M P/E: 19.71 Central Parking Corporation is a provider of parking and related services in the United States, Canada, and the United Kingdom. It engages in the ownership, leasing, and management of multilevel parking facilities and surface lots. It also provides ancillary services, including parking consulting, such as parking facility design, layout, and utilization; on-street parking fee collection and enforcement services; shuttle bus and van services; and accounts receivable billing systems and services. As of September 30, 2006, the company operated 1,520 parking facilities under management contracts and 1,296 parking facilities under leases. ServiceMaster Co (SVM) Market Cap: $3.80B P/E: 22.33 ServiceMaster is a national service company that serves both residential and commercial customers. They provide lawn care and landscape maintenance; termite and pest control; home warranty and home inspection services; plumbing, drain cleaning, heating, ventilation, air conditioning and electrical services, and cleaning, disaster restoration and furniture repair. These services are provided through a network of over 5,500 company-owned and franchised locations and operate via five principal segments: TruGreen ChemLawn, TruGreen LandCare, Termix, and American Home Shield and other Operations. Ecolab Inc. (ECL) Market Cap: $11.00B P/E: 32.39 Ecolab develops and markets products and services for the hospitality, foodservice, healthcare and industrial markets. The services they provide include cleaning, sanitizing, pest elimination, maintenance and repair products and services primarily to hotels and restaurants, healthcare and educational facilities, quick-service (fast-food and other convenience store) units, grocery store, commercial and institutional laundries, light industry, dairy plants and farms, food and beverage processors, pharmaceutical and cosmetics facilities and the vehicle wash industry. The Company operates in three segments: United States Cleaning & Sanitizing Segment, United States and Other Services Segment and International Segment. Standard Parking Corp. (STAN.O) Market Cap: $373.80M P/E: 22.97 Standard Parking Corporation provides onsite management services at multi-level and surface facilities for all major markets of the parking industry. They operate and develop parking properties throughout the United States and Canada. The Company’s client base includes private and public owners, managers and developers of major office buildings, residential properties, commercial properties, shopping centers, and other retail properties, sports and special event complexes, hotels, and hospitals and medical centers. As of December 31, 2005, the company manages more than 1,900—parking facilities and 112 parking-related and shuttle bus operations serving 64 airports.


Insurance Claims Related to the Destruction of the World Trade Center in New York City on September 11, 2001
On September 11, 2001, ABM Industries lost their largest single job-site during the destruction of the World Trade Center complex in New York—the site generated annual Sales of approximately $75.0 million for the company. Fortunately, the Company had commercial insurance policies covering business interruption, property damage and other losses related to these losses. As a result of these losses, the Company has been engaged in protracted litigation with Zurich Insurance Company to recover its losses of business profits. The litigation was settled on August 15, 2006 for $80.0 million and the proceeds were received in September 2006. The Company recognized the $80.0 million settlement into income from continuing operations in the fourth quarter of 2006. Thus, when calculating the financial ratios for the valuation of the Company, we taken this into account and we have subtracted the $80.0 million from the income from continuing expenses recorded in the fourth quarter of 2006 and $95.2 received in accumulated payments from Zurich in the relevant periods.

Ratio Analysis
Liquidity Ratios
LIQUIDITY 2006 1.73 1.66 2006 (WTC Insurance Claim Included) 1.98 1.91 2005 1.89 1.81 2004 1.91 1.83 2003 1.95 1.87 2002 1.88 1.75 CPC 0.85 0.85 SVM 1.07 1.00 ECL 1.23 0.92 STAN 0.82 0.82 Industry 1.81 1.65

Current Ratio Quick Ratio

At a first glance, ABM’s current and quick ratios appear to be those of the ideal company—during 2006 these were above and beyond those of their competitors and the industry and have been increasing steadily throughout the years. After deducting the World Trade Center collected insurance money, though, ABM’s ratios are not as impressive but are still well above those of it’s competitors. The company’s current ratio shows that it would be better able to pay off its current liabilities by liquidating its current assets that it’s competitors but not as able as the industry as a whole. The more conservative quick ratio shows, once again, that ABM has greater liquidity than its competitors and just about the same liquidity as the industry. The quick ratio might be a more applicable ratio for ABM since its inventories consist of only service-related supplies and don’t make up such a significant portion of the company’s current assets. Although ABM’s liquidity ratios were lower in 2006 than in the previous years, we do not believe this to be significantly unfavorable, since these are still higher than that of their competitors. Asset Management Ratios
ASSET MANAGEMENT 2006 CA Turnover 5.06 Fixed Asset Turnover 81.64 Total Asset Turnover 2.95 Inventory Turnover 109.91 SE Turnover 5.33

2005 5.14 78.83 2.96 106.23 5.64

2004 4.82 74.99 2.88 98.80 5.54

2003 4.88 66.30 3.02 79.12 5.54

2002 4.89 52.22 3.17 69.49 5.84

CPC 6.93 3.56 1.34 NM 1.50

SVM 3.59 19.93 1.06 28.60 3.17

ECL 3.36 5.43 1.22 6.84 2.79

STAN 0.01 0.04 2.99 NM 0.03

Industry NA NA 0.98 22.77 NA


The total-asset turnover tells us that for every dollar in total-assets, ABM has generated $2.95 in revenue. This dollar generating power of their total assets is well above that of the industry and their competitors, with the exception of STAN, whom generates a close $2.99 in revenue. Also, the fixedasset turnover ratio measures sales per dollar of the firm’s money tied up in fixed-assets. As shown above, ABM’s fixed-asset turnover ratio has been increasing throughout the years and is much higher than its competitors. This is not surprising because of the type of business that ABM engages in— which is heavily dependant on Fixed-Assets—and it is good to see that they are efficient at generating revenue from these. Furthermore, their current-asset turnover is well above those of their competitors, with the exception of CPC at 6.93 and has remained relatively consistent throughout the years. Finally, as seen by the Company’s SE Turnover, shows that ABM has done a consistent job of generating sales from their Stockholder’s Equity. Debt Management Ratios
DEBT MANAGEMENT Debt-to-Asset Ratio Debt-to-Equity Ratio Equity Multiplier 2006 0.00 0.00 1.73 2005 0.00 0.00 1.90 2004 0.00 0.00 1.91 2003 0.00 0.00 1.87 2002 0.00 0.00 1.13 CPC 0.22 0.41 1.94 SVM 0.22 0.84 1.54 ECL 0.18 0.42 2.30 STAN 0.44 2.43 8.25 Industry NA 0.97 NA

ABM Industries does not use any debt in their operations. This gives them an automatic advantage over their competitors who do use debt. Dividend Ratios
DIVIDEND PAYOUT RATIO 2006 23.15% 2005 35.80% 2004 63.91% 2003 20.50% 2002 39.97% CPC 5.75% SVM 77.32% ECL 28.70% STAN 0.00% Industry 17.25%

Although ABM has been paying a smaller percentage of it’s earnings as dividends throughout the years, it still pays a higher dividend than its industry and most of its competitors. ABM might be holding off on paying off a bigger percentage of their earnings in order to use this money for expansion of the company or in order to finance acquisitions. Profitability Ratios
PROFITABILITY Gross Margin Net Profit Margin EBIT Profit Margin Return on Assets Return on Equity 2006 10.73% 3.34% 2.88% 9.85% 17.05% 2005 10.56% 2.24% 2.48% 6.63% 12.60% 2004 9.16% 1.28% 1.94% 3.69% 7.04% 2003 10.02% 4.02% 2.40% 12.14% 22.70% 2002 10.26% 2.13% 2.53% 6.75% 7.63% CPC -54.90% 3.11% 10.59% 4.16% 7.79% SVM 37.52% 5.10% 10.50% 5.39% 16.47% ECL 50.40% 7.39% 11.95% 8.99% 20.42% STAN 12.61% 2.86% 4.09% 8.56% 64.58% Industry 43.86% 11.45% NA 9.72% 22.09%

As a percentage of sales, ABM’s Profit Margin is less than that of its industry and most of its competitors. Nonetheless, it has remained consistent throughout the years and its Gross Margin and EBIT Profit Margin are higher than they have been in the past five years, and it’s Net Profit Margin 10

has been rising since 2003—the reason the Margin in 2003 was higher is because they received a large gain from the sale of discontinued operations during this fiscal year. Furthermore, ABM’s ROA is more favorable than the rest of the industry and its competitors while its ROE is higher than only CPC and SVM and slightly less than the industry.

EXTENDED DUPONT MODEL ROE 2006 2005 2004 2003 2002 CPC SVM ECL STAN 17.05% 12.60% 7.04% 22.70% 7.63% 8.08% 8.33% 20.74% 70.55% = = = = = = = = = = Net Profit Margin 3.34% 2.24% 1.28% 4.02% 2.13% 3.11% 5.10% 7.39% 2.86% x x x x x x x x x x Total Asset Turnover 2.95 2.96 2.88 3.02 3.17 1.34 1.06 1.22 2.99 x x x x x x x x x x Equity Multiplier 1.73 1.90 1.91 1.87 1.13 1.94 1.54 2.30 8.25

The Extended DuPont Model shows us how the Return on Equity is derived and what factors determine it. As mentioned above ABM’s ROE has been increasing throughout the past five years (with the exception of 2003, because of the sale of discontinued operations). This improvement has resulted from an increase in Net Profit Margin, which suggests that the company is doing a better job of controlling costs whiling continuing to grow its sales.


Multiple Valuations
Price/Earnings Valuation In our P/E Valuation in order to find the most likely price using P/E, we used the forward P/E for our most likely scenario. For the pessimistic scenario we used the lowest P/E ABM has ever traded at which was a P/E of 12.06. For the optimistic scenario the Industry average of 34.6 was used. In calculating EPS, the most likely EPS of $1.49 was taken from the ProForma Income statement. For the pessimistic and optimistic values we added and subtracted 15% to get $1.27 and $1.71, respectively.


Pessemistic Most Likely Optimistic

Pessimistic Most Likely Optimistic EPS $ 1.27 $ 1.49 $ 1.71 12.06 15.27 17.97 20.66 20.93 26.51 31.19 35.86 34.6 43.82 51.55 59.29

Price/Book Valuation Book value per share has been increasing at a historical 3 year average of 7% including the trailing twelve months, and is expected to continue this trend. Therefore, the most likely book value per share we came up with was a 7% increase from 2006 of $11.90. Valueline predicted book value per share to be $14.10 in 2007 which we decided to use as our optimistic scenario. For our pessimistic we used the current book value per share of $11.13. For our P/B multiples we used a most likely P/B of 2.35 which is the current multiple taken from Yahoo! Finance and Reuters. In order to come up with a pessimistic and optimistic scenario we subtracted and added 15% to come up with values of 2.00 and 2.70 respectively.

BV/Share P/B Pessemistic Most Likely Optimistic 2 2.35 2.7

Pessimistic Most Likely Optimistic $ 11.13 $ 11.90 $ 14.10 22.26 23.80 28.20 26.16 27.97 33.14 30.05 32.13 38.07


Price/Sales Valuation In calculating the Sales per share for our valuation, the pessimistic scenario was arrived at by using sales from the current 2006 income statement and dividing that number by the total amount of shares outstanding in 2006 giving us a value of $56.22. For our most likely scenario we used what we are expecting sales to be in 2007 and divided that by the number of expected shares outstanding which gave us $63.01. For our optimistic we simply added 15% to our most likely sales per share giving us $72.46. In finding the P/S for the most likely scenario we simply used the current P/S multiple given to us by Yahoo! Finance and Reuters of 0.47. For the pessimistic and optimistic we subtracted and added 15% to the most likely scenario giving us a P/S of 0.40 and 0.54, respectively.

S/Share P/S Pessemistic Most Likely Optimistic 0.40 0.47 0.54

Pessimistic Most Likely Optimistic $ 56.22 $ 63.01 $ 72.46 22.49 25.20 28.98 26.42 29.61 34.06 30.36 34.03 39.13

Price to Cash Flow Valuation In calculating cash flow per share, we identified a growing trend in the last 3 years and thus decided to use the current cash flow per share value of $2.66 as the pessimistic scenario. In order to calculate the most likely value we added 13.97%, the historical five-year growth rate, to get a value of $3.03. For the optimistic scenario we added 10% to the most likely scenario to get a value of $3.33. In calculating the P/CF we used the current P/CF of 9.66 as the pessimistic value. For the most likely and optimistic values we increased the pessimistic by 5% and 10% respectively to get values of 10.14 for the most likely and 11.15 for the optimistic scenario.

CF/Share P/CF Pessemistic Most Likely Optimistic 9.66 10.14 11.15

Pessimistic Most Likely Optimistic $ 2.66 $ 3.03 $ 3.33 25.70 29.27 32.17 26.97 30.72 33.77 29.66 33.78 37.13


Pro Forma Statement ABM Industries Inc.
ProForma Income Statement Fiscal Years Ended October 31 ($ in thousands)
Sales growth Net sales Cost of Services Gross Profits SG&A Expense Forecast 2007 10% Forecast 2008 10% Forecast 2009 7% Forecast 2010 7% 3,868,764.22 3,442,039.53 426,724.69 288,222.93 Forecast 2011 7% $ 4,139,577.72 $ 3,682,982.29 $ 456,595.42 $ 308,398.54 $ % of Sales

$ 3,071,935.00 $ 3,379,128.50 $ 3,615,667.50 $ $ 2,733,100.57 $ 3,006,410.63 $ 3,216,859.37 $ $ 338,834.43 $ 372,717.87 $ 398,808.12 $ $ 228,859.16 $ 251,745.07 $ 269,367.23 $ $ $ $ $

100.00% 88.97% 11.03% 7.45%

EBIT Interest Expense EBT Income Taxes Net Income Common Shares Outstanding Earnings Per Common Share

$ $ $ $ $

109,975.27 $ $ 109,975.27 $ 37,391.59 $ 72,583.68 $ 48,752 1.49 $

120,972.80 $ $ 120,972.80 $ 41,130.75 $ 79,842.05 $ 48,752 1.64 $

129,440.90 $ $ 129,440.90 $ 44,009.90 $ 85,430.99 $ 48,752 1.75 $

138,501.76 $ $ 138,501.76 $ 47,090.60 $ 91,411.16 $ 48,752 1.88 $

148,196.88 148,196.88 50,386.94 97,809.94 48,752 2.01

3.58% 0.00% 3.37% 34.00% 2.22%


Sales The historical sales growth average for ABM Industries Inc. in the last 5 years was 7.01%. After analyzing ABM Industries, we believe business prospects remain challenging and competitive, but see benefits in current trends and expansion efforts therefore justifying a 10% growth in sales for the first two years. Analysts also estimated a 10% sales growth for 2007. After 2008 we reduced sales growth to 7% due to the tough competitive nature of ABM’s business. We believe these sales growth assumptions to be very conservative. Forecast The Cost of Services and SG&A expense assumptions were calculated using a historical 3 year average of each as a percentage of sales. The historical average for Cost of Services was 88.97% while the SG&A expense average was 7.45%. In a similar manner, EBIT margin was calculated at 3.58% of sales. Due to an outlier in 2006 causing a considerable hike in the tax rate for ABM, I used a 34% rate which had previously been used in preceding years. Using the same historical average method as before, I calculated a Net Profit Margin of 2.22% for the five year forecast. We believe this to be a conservative measure of Net Profit Margin, which in retrospect has had a rising trend since 2003. Common Shares Outstanding The number of shares were held constant at 48,752,000 for the purpose of this Pro-Forma Income statement and DCF analysis.


Free Cash Flow to the Firm ABM Industries Inc.
DCF Analysis Fiscal Years Ended October 31 ($ in thousands)
Net Income Plus:Depreciation/Amoritization Less: Capital Expenditures Less: Changes in NWC FCFF PV of FCFF Terminal Value PV of Terminal Value PV of FCFF PV of Firm Non-Current Liabilities Outstanding Value of Equity Shares Outstanding Price Per Share $ $ $ $ $ $ Forecast 2007 72,584 16,281 12,288 21,504 55,074 50,254 $ $ $ $ $ $ Forecast 2008 79,842 17,909 13,517 23,654 60,581 50,442 $ $ $ $ $ $ Forecast 2009 85,431 19,163 14,463 25,310 64,822 49,250 $ $ $ $ $ $ Forecast 2010 91,411 20,504 15,475 27,081 69,359 48,086 $ $ $ $ $ $ $ $ $ $ $ $ $ Forecast 2011 97,810 21,940 16,558 28,977 74,214 46,950 1,697,714 1,074,014 244,983 1,318,996 26,917 1,292,079 48,752 26.50

Equation: r = Rf B(E(Rm)-Rf) Risk free rate Beta Risk premium r 4.79% 10 Year U.S. Treasury Bond 0.80 6.00% 9.59%

FCFF Value Drivers
Estimated Sales Growth Dep. as a % of Sales CapEx as % of Sales NWC as % of Sales 2007 10% 0.53% 0.40% 0.70% 2008 10% 0.53% 0.40% 0.70% 2009 7% 0.53% 0.40% 0.70% 2010 7% 0.53% 0.40% 0.70% 2011 2012-perp. 7% 5% 0.53% 0.53% 0.40% 0.40% 0.70% 0.70%


Depreciation I forecasted a historical average of depreciation expense as a percentage of Sales. This was the only non-cash charge added back to Net Income in the forecasted future cash flows of the DCF analysis. Incremental Fixed Capital Investment This percentage was taken from the historical ratio of the change in Capital Expenditures per change in Net Sales at 0.40% of sales. Net Working Capital The change in Net Working Capital was calculated by taking the change in working capital per year and the change in sales per year. I then calculated the increase in working capital as a percentage of sales. This gave me a historical average as a percentage of sales of 0.70%. Discount Rate The discount rate was calculated using the Capital Asset Pricing Model due to the fact that there is no outstanding debt on the balance sheet. Using the 10-year U.S. Treasury Bond yield of 4.79%, a risk premium of 6% and a beta of 0.80 my calculation yielded a discount rate of 9.59%. Terminal Value We forecasted terminal value using a terminal growth rate of 5%. After adding the present values of the FCFF and the Terminal value, and subtracting non-current outstanding liabilities, we arrived at a total value of equity of $1,292,079,000. We divided this number by the number of shares outstanding in order to come up with the present value of the price per share of $26.50.

Analyst Coverage

Firm Name Sidoti & Company LLC Matrix USA Lehman Brothers

Analyst David Gold Ivan Feinseth Jeffrey T Kessler

Recommendation Buy Hold Equalwt/Neutral

Target Px 30

Last Update 1/30/2007 1/5/2007




Investor Relations:
Unfortunately we have been unsuccessful in contacting investor relations. We do though have some inquiries about the company and will keep trying to contact ABM Investor Relations. If indeed we are successful, an addendum will be passed on to fellow Fund Managers on Thursday before voting.

In retrospect, we believe ABM Industries to be a solid company with a strong presence in its industry and in its five business segments. They have also been profitably consistent and have potential for future earnings going foreword. ABM also has a very positive outlook in 2007. They have little risk financially due to having no L-T debt and possess strong financial ratios. Our multiple valuations show that currently ABM Industries is undervalued in all four valuations; P/E, P/B, P/S, and P/CF. These results have prompted us to recommend a buy for ABM Industries. Our DCF analysis though shows ABM is undervalued, but only slightly. This along with weak net profit margins have prompted us to recommend the buy, but only on a half position of 1,000 shares, because we believe we should wait and see if ABM is indeed able to lower costs, thus increasing their margins.

Recommendation: Buy/half position: 1,000 shares


ABM Industries Incorporated Consolidated Balance Sheet
Years ended October 31, (in thousands, except share data)
2006 Assets Cash and cash equivalents Trade accounts recievables (less allowances of $8,041 and $7,932 Inventories Deferred income taxes Prepaid expenses and other current assets Prepaid income taxes Total current assets Investments and long-term recievables Property, plant and equipment (less accumulated depreciation of $86,837and $80370 Goodwill (less accumulated amortization of $67,557 Other intangibles (less accumulated amortization of $15,550 and $13,478 Deferred income taxes Other assets Total assets $ 134,001 $ 383,977 22,783 43,945 47,035 631,741 14,097 32,185 247,888 23,881 42,120 24,362 1,016,274 $ 2005 56,793 345,104 21,280 46,795 44,690 6,791 521,453 12,955 34,270 243,559 24,463 46,426 20,584 903,710


Liabilities Trade accounts payable $ 66,336 $ 47,605 Income taxes payable 36,712 2,349 Accrued liabilities Compensation 78,673 72,034 Taxes-other than income 20,587 18,832 Insurance claims 66,364 71,455 Other 50,613 62,799 Total current liabilities 319,285 275,074 Stockholders' equity Preferred stock, $0.01 par value; 500,000 shares authorized; none issued Common stock, $0.01 par value; 100,000,000 shares authorized; 55,663,472 & 54,650,514 shares issued at Oct 31, 2006 & 2005, respectively 557 547 Additional paid-in capital 225,796 206,369 Accumulated other comprehensive income (loss) 149 (68) Retained earnings 437,083 365,455 Cost of treasury stock (7,028,500 and 5,600,000 shares at October 31, 2006 and October 31, 2005, respectively (122,338) (96,377) Total stockholders' equity 541,247 475,926


ABM Industries Incorporated Consolidated Income Statement
Years ended October 31, (in thousands, except per share data)
2006 10/31/06 In Millions of U.S. Dollars (except for per share items) Revenue Other Revenue, Total Total Revenue Cost of Revenue, Total Sell/General/Admin. Expenses,Total Depreciation/Amortization Interest/Expense (In),Net Operating Total Operating Expense Operating Income Net Income Before Taxes Provision for Income Taxes Net Income After Taxes Net Income Before Extra. Items Total Extraordinary Items Net Income Total Adjust to Net Income Income Available to Common Excl. Extra. Items Income Available to Common Incl. Extra. Items Basic/Primary Weighted Average Shares Basic/Primary EPS Excl. Extra. Items 2,713 80 2,793 2,422 207 6 0 2,635 158 158 65 93 93 0 93 -93 93 49 1.900 2,587 1 2,588 2,313 204 6 1 2,523 64 64 21 44 44 14 58 -44 58 49 0.883 2005 10/31/05 2004 10/31/04
Restated 10/31/05

2003 10/31/03
Restated 10/31/05

2002 10/31/02
Restated 10/31/04

2,375 0 2,375 2,158 167 5 1 2,330 45 45 15 30 30 1 30 -30 30 49 0.609

2,222 0 2,222 2,008 160 2 1 2,170 52 52 17 35 35 56 91 -35 91 49 0.705

2,068 10 2,078 1,858 156 1 1 2,017 61 61 20 42 42 3 44 0 42 44 49 0.849