Aryeh Capital Management’s Thesis on Servicemaster Global Holdings Inc (SERV)

Aryeh Capital in bullish on Servicemaster Global Holdings Inc (NYSE:SERV) a $6 billion dollar company whose stock is up 18.5% year-to-date. Per Aryeh, Servicemaster Global Holdings Inc (NYSE:SERV), which has three segments, is made out of respectively:

ServiceMaster is a collection of three somewhat disparate businesses. The first is Terminix, a high-quality termite and pest-control company that is the market leader in the space, which represents 55% of EBITDA. The second is American Home Shield (AHS), the market leader in home warranties, which represents 35% of EBITDA. And the final bit, which is 10% of EBITDA, is a franchise business that does everything from residential and commercial cleaning, to natural disaster restoration, to home inspections and furniture repair.

…The most interesting piece of the story from here is that management has decided to separate AHS and Terminix by spinning off AHS in order to unlock value for shareholders. The spinoff is expected later in 2018 and we think that’s the next catalyst for the business to continue to unlock value for shareholders. We think the stock is worth $60 today based on conservative sum-of-the-parts math.

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As for why Aryeh is bullish, the fund likes the company’s very high quality assets, all of which have market leading positions, relatively limited exposure to cycles, high margins, and the fact that the market hasn’t given enough credit to the company. As for why the market hasn’t given enough credit, the fund believes investors have discounted the stock too much due to Terminix having shown decelerating organic growth over the past few quarters and the fact that ‘there were some very vocal bears suggesting the business had been broken by prior private equity owners in a way that it could never recover’.

Obviously, the fund doesn’t believe the bear case has merit and also views the doubters as having overlooked American Home Shield, which has a competitive advantage in scale and has grown around 10% a year. In part due to that segment, the fund believes Servicemaster Global Holdings Inc (NYSE:SERV) could grow free cash flow by around 15-20% per year for at ‘least a handful of years’ and that the stock is ‘worth $60 today based on conservative’ sum of parts estimates. Although the stock has around 4x leverage and there is the risk that Terminix doesn’t grow as fast organically as expected, the fund notes that the leverage is in the form of long term debt, and remains bullish.

Disclosure: None