First Service (NASDAQ:FSV) is an essential outsourced property service provider in North America. She has won Roofing Corp of America, which I believe can act as a major catalyst for the company’s growth expanding its geographic footprint and customer base.
FSV deals in the essential services sector of contracted properties mainly in the North American market. It serves its customers in two operating segments: FirstService Residential and FirstService brands. The Residential FirstService segment primarily provides a variety of property management services across a broad geographic region to a variety of clients, including homeowner associations, cooperatives, active adult and lifestyle communities, master-planned communities and other residential developments governed by multi-unit residential community associations and or common interest. It operates around 8,700 communities, comprising over 4 million inhabitants. It offers several ancillary services: a full-service pool, on-site engineering and building maintenance staff, security and a front desk. These services are mainly offered by contract with a fixed monthly fee. FirstService Residential contributed approximately 47.31% to the company’s total revenue in 2022. The First Service Brands segment operates and provides core property services to commercial and residential clients. Deals in commercial and residential restoration, custom designed and installed cabinets, flooring design and installation services, painting, home inspection services, home maintenance solutions and fire protection and related services. This division represented approximately 52.69% of the firm’s earnings. The company has five franchise networks: Paul Davis Restoration, CertaPro Painters, Pillars to Post Inspectors Home, California Closets and Floor Coverings International.
Acquisition of Roofing Corp of America
The property management services market declined during the Covid-19 pandemic and later due to inflationary pressures. However, the company has maintained its upside and managed steady revenue growth. Industrial scenarios are slowly changing as economic conditions are steadily stabilizing. The housing sector is estimated to expand next year. According to the National Association of Realtors, existing home sales could increase 13.5% annually from 4.10 million to 4.71 million. I think this creates a huge opportunity for the company, which could cause significant demand for its services. In addition, trends in development of home owners’ associations are very positive and show a turnaround which is also one of the growth factors for the company. Identifying these scenarios, FSV has recently announced the purchase of Roofing Corp of America, for a transaction price of $413 million, which is a North American commercial roofing firm. This addition can greatly benefit the company in enhancing its capabilities in maintenance, property repair and restoration. Roofing Corp provides end-to-end roofing services including new roof installations, re-roofing and repairs and maintenance to building owners, HOAs and property and facility managers. It generates $400 million in annual revenue. I believe this deal can act as a catalyst to accelerate the company’s growth as the acquired firm has significant scale, broad product offerings and geographic footprint that can help the company capture additional market share and increase profitability. her by adding more clients to her portfolio. Additionally, Roofing Corp is a competitive player in the North American market, which can help FSV establish its strong presence and increase its market penetration, which can further increase its revenue. .
The company has consistent distribution which shows its strong positioning. It paid a dividend of $0.225 in each of the four quarters of the current year, which makes the annual payout $0.9 and represents a yield of 0.56%. This dividend yield makes the company a good stock, especially for risk-averse investors and retirees who seek regular fixed income along with capital appreciation. I believe that its expansion activities can further increase its cash flows and we can expect increased returns in the coming year.
What is the main risk facing FSV?
Demand for the company’s services is highly dependent on market conditions such as resale rates, property values and liquidity for real estate transactions. A market that has high resale rates presents a good opportunity for the company as demand for its services such as painting, cabinet installation, storage solutions and home inspection increases. However, if the real estate industry slows down due to the economic downturn, it may reduce transactions and result in low spending by homeowners on such additional services, which may further exacerbate the demand for FSV solutions and lead to shrinking of its profit margins.
The industry was facing some headwinds due to macroeconomic pressures, however, it is steadily showing signs of recovery. To meet this growing demand, FSV has recently acquired Roofing Corp of America which can increase its profitability by strengthening its service capabilities and increasing its customer base. After considering all these factors, I am estimating an EPS of $5.79 for FY2024, which gives a forward P/E ratio of 28.07x. After comparing the forward P/E ratio of 28.07x to the sector average of 35.47x, we can conclude that the company is undervalued. I think the firm could potentially grow in the coming year as a result of positive demand in the industry and its recent acquisition, which could help it trade above the current P/E ratio. I estimate that the company could trade at a P/E ratio of 34.49x in 2024, giving a target price of $199.69, which is a 22.86% upside to the current share price of $162.53 dollars. A weaker real estate market may affect the company’s financial performance during adverse economic conditions. I think in that case, it can contract the company’s profit margins and EPS.
P/E ratio estimates
The best case
The case of the bear
I believe in the scenario of lower sales due to unfavorable industry conditions, FY2024 EPS could be $5.67 and I estimate that the company could trade at a P/E ratio of 34.36x, giving a price of target of $194.82, representing an increase of 19.86%.
The company is experiencing positive growth which is reflected in the increase in its income. I believe it can sustain this growth for a longer period due to the recovery in industry demand combined with the company’s recent acquisition, which could potentially increase its profitability while expanding its customer base. However, it is exposed to the risk of cyclicality which could contract its profit margins. It also pays steady dividend. The stock is currently undervalued and investors can expect healthy upside of 20%-23% from current price levels as a result of its significant portfolio expansion. Considering all the above factors, I assign a buy rating to FSV.