A Member of Pat McKeough’s Inner Circle recently asked for his advice on BrightView, a commercial landscaping company that operates on a national scale in the U.S.
Pat likes the track record of rising revenues since its IPO but notes that the company’s high debt and ‘growth by acquisition’ strategy are also potential red flags for the future.
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BrightView Holdings Inc. (Symbol BV on New York; www.brightview.com), is the largest provider of commercial landscaping services in the U.S. This includes designing, creating, and maintaining landscapes at premier properties across the U.S., including business parks and corporate offices, homeowners’ associations, healthcare facilities, educational institutions, retail centers, resorts and theme parks, municipalities, golf courses, and sports venues. The company also provides comprehensive snow and ice removal services.
BrightView is the official field consultant to Major League Baseball.
The company was formed in 2015 through a merger between The Brickman Group (acquired by KKR & Co., symbol KKR on New York, for $1.6 billion in 2013) and ValleyCrest Landscaping.
BrightView went public on June 27, 2018, in an IPO at $22 per share.
The company continues to grow by acquisition. For example, on November 15, 2022, it acquired Apex Land Group, LLC, a commercial landscaping company, based in Myrtle Beach, South Carolina. The purchase price has not yet been disclosed.
Apex is one of the top service providers in its market. Founded in 2019, the firm is a full-service landscaping company specializing in commercial landscape management, irrigation, and new construction landscape installation. The acquisition of Apex expands BrightView’s Myrtle Beach presence.
Prior to that, in August 2022, BrightView bought Syringa Landscape, LLC, a commercial landscaping company, based in Boise, Idaho. The purchase price has not yet been disclosed.
Syringa is one of Boise’s leading landscapers, with a focus on commercial landscape maintenance, installation, and snow removal. Founded in 2008, the firm services marquee accounts in the greater Boise market, including medical facilities, apartment complexes, corporate campuses, and homeowners’ associations.
In the five years from 2018 to 2022 (fiscal years end September 30), BrightView’s revenue grew 17.9%, from $2.35 billion to $2.77 billion. Earnings, excluding one-time items, rose 40.3% between 2018 and 2021—from $90.0 million, or $1.08 a share, to $126.3 million, or $1.20 a share. Earnings then declined in fiscal 2022, by 20.1%, to $100.9 million, or $1.03 a share. That fall was due to a decrease in high-profit-margin snow removal revenues due to much lower snowfall, higher fuel costs and the reinstatement of the employer match for the employee savings plan.
Inner Circle: Lower snowfall hurts revenue—and earnings for BrightView
Meanwhile, in the quarter ended March 31, 2023, BrightView’s revenue fell 8.6%, to $650.4 million from $711.9 million, a year earlier. The fall was largely due to a decrease of $77.4 million in revenue from snow removal services associated with lower snowfall in the latest period. The decrease in revenue was partially offset by a $17.1 million revenue contribution from acquired businesses.
Excluding one-time items, the company lost $6.7 million, or $0.07 a share, in the latest quarter. That’s compared to a profit of $18.3 million, or $0.18 a share. The decrease was principally driven by the lower revenue.
BrightView’s long-term debt of $1.34 billion is a very high 2.1 times its market cap. The company’s goodwill of $2.0 billion is also a very high 3.2 times market cap.
As mentioned, BrightView continues to grow quickly through acquisitions. Growing through acquisitions can be risky since it adds debt and goodwill to the balance sheet. When one firm buys another for more than the value of its land and equipment and other tangible assets, the acquiring firm treats the excess as “goodwill”. If a takeover goes sour, however, the acquiring firm has to write off that goodwill against earnings, to give an accurate view of its finances. One failed acquisition can devastate earnings and the stock price.
BrightView aims to cut that risk by buying mostly smaller rivals that fit well with the company’s existing operations in the same markets.
All in all, the landscaping business provides recurring revenue. Most of BrightView’s services, such as cutting grass, are seen as necessary to clients regardless of whether the economy is growing or not. However, BrightView continues to face a major challenge in finding workers, and that could hold back profits and slow its ability to pay down its high debt.
Recommendation in Pat’s Inner Circle: BrightView Holdings Inc. is a hold.