Stifel: Buy ServiceMaster Global Ahead Of Business Split

Servicemaster Global Holdings Inc (NYSE: SERV)'s planned split into two units — Terminix pest control and American Home Shield — is an "added benefit" for an already strong company, according to Stifel.

The Analyst

Stifel's Michael Hoffman initiated coverage of ServiceMaster Global with a Buy rating and $70 price target.

The Thesis

Pest control represents an $8.2-billion market in North America and is growing at a 3 percent rate annually, Hoffman said in the initiation note. (See the analyst's track record here.) 

ServiceMaster is the largest pest control operator in the North American residential market and is a top five company in the North American commercial market, the analyst said. 

The company is hoping to leverage its strong brand name to generate an organic growth rate of 3-5 percent, with tuck-in deal activity accounting for another 1 to 3 percent, Hoffman said. This should result in better margins and more free cash flow conversion and sales growth throughout fiscal 2018 and 2019, he said.

Over a 10-year period, ServiceMaster should see a 5.2-percent organic compound annual growth rate, according to Stifel. 

The company's decision to spinoff American Home Shield has yet to be fully disclosed, and it is not clear today what the balance sheet will look like, the analyst said. Investors will benefit from a tax-free spin, but the bulk of the investment thesis for ServiceMaster Global lies with expectations for strong growth in the core business, he said. 

Price Action

ServiceMaster Global Holdings shares were trading higher by nearly 1 percent at $59.02 at the time of publication Tuesday. 

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