Fewer weather-related projects and higher interest costs are impacting FirstService’s bottom line but we expect the earnings dip to be temporary as the firm continues to make smart acquisitions in a largely fragmented industry.
The stock trades at 35.9 times the company’s forward earnings forecast, a high multiple but a reasonable one due to the company’s dominant market position, aggressive growth strategy and steady recurring revenue streams.
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FIRSTSERVICE CORP. (Toronto symbol FSV; www.firstservice.com) provides property management services to businesses and individuals.
The U.S. supplies 88% of the company’s overall revenue. The remaining 12% comes from Canada.
The company has two main businesses: FirstService Residential provides property management services, such as collecting monthly condominium maintenance fees, preparing financial statements, and providing on-site security and property cleaning/maintenance services; and FirstService Brands offers a wide variety of property management services through several franchised businesses, including Paul Davis Restoration, CertaPro Painters, California Closets, Post Home Inspectors, Floor Coverings International and College Pro Painters.
FirstService operates in a highly fragmented industry, so it tends to fuel its growth with acquisitions. Growing rapidly through acquisitions involves special risk. Debt can rise quickly. When an acquisition goes sour, the buyer faces heavy goodwill write-offs which can devastate earnings. What’s more, as potential acquisition candidates get scarcer, the temptation could be to move outside of areas you know well into new areas.
FirstService cuts the risk of this strategy by focusing on smaller businesses that expand its market share and geographic reach. Moreover, many of the former owners continue to run their businesses. That lets FirstService utilize their local knowledge and expertise.
Growth Stocks: Acquisition spree continues to boost revenues
In the first half of 2024, FirstService spent $154.6 million on acquisitions of smaller firms (all amounts except share price in U.S. dollars).
Those new businesses helped lift its revenue in the quarter ended June 30, 2024, by 15.9%, to $1.30 billion from $1.12 billion a year earlier. That topped the consensus forecast of $1.28 billion.
However, higher interest costs cut its earnings by 6.8%, to $1.36 a share from $1.46. Even so, that also beat the consensus estimate of $1.28 a share.
FirstService will probably earn $4.78 U.S. a share in 2024, and the stock trades at 35.9 times that forecast. That’s a high multiple, but still acceptable in light of the company’s quality businesses and steady revenue streams from recurring contracts. The $1.00 U.S. dividend yields 0.6%.
Recommendation in The Successful Investor: FirstService Corp. is a buy.
