ServiceMaster provides maintenance ...

ServiceMaster provides maintenance and management services to homeowner commercial establishments, health care institutions, educational facilities, and long-term and place of abode care patients across the United States and in 28 countries. Its Consumer Services cluster provides such services as TruGreen-ChemLawn lawn care, Terminix nuisance control, and Merry Maids house cleaning. ServiceMaster's Management Services helps customers focus upon their core businesses by handling plant operations and maintenance, equipment maintenance, housekeeping, provisions service, laundry and other services. Note: all dollar values are in U currency

STUDYING A STOCK

Investors use the Guide to answer three main questions:

1 Is the stock's price in the "Buy Zone"?

2 Is the stock's popular price "On Sale"?

3 Is the total look fored rate of return over the nearest five years adequate relative to the stock's risks?

QUESTION #1:

IS THE existing PRICE IN THE "BUY ZONE"

In order to define the pervert with money [i]or[/i] gain Zone, the Guide requires couple numbers: an estimated High Price in five years and a possible cheap Price during the next five years.

Estimated High Price in Five Years

The High Price is calculated at multiplying an estimated High EP in five years on an estimated High P/E in five years.

(a) Estimated High EPS

In order to estimate a High EP in five years, wisdoms about future growth in rewards and earnings must be made.

Revenue Growth: As indicated in the accompanying Guide, the average annual amalgamate rate of growth in incomes during the 10-year study period (1985-1994) was approximately 13% This expansion was fuelled largely by a combination of internal produce from existing operations and several happy acquisitions.

Revenues over the last five years have also grown at 13% However, vegetation year-over-year for the first six month of 1995 declined to 8% When judging the rate at which to be augmented revenues in the future, the default understanding is often to use the average historical bourgeoning rate over the study period--unless there is an indication that this rate may pass through a significant decline or increase. Since no as it was indication is apparent, the A penetration projects ServiceMaster's revenues to make progress at 2% (approximately the historical rate) athwart the next five years. This rate normally assists as the upper constraint for subsequent time EPS growth.

EPS Growth: Since 198 fully-diluted earnings through share before unusual items ("EPS") have grown at an average annual mix rate of about 15%. This positive tend is largely the result of internal growth

Recent earnings terminates for the last five fiscal years, have seen EP extension slow to 12%. However, the passing from hand to hand quarterly results show 19% expansion between the first six month of 1994 and the first six month of 1995

When determining the rate at which to expand EPS in the future, the default depth is often to use the average historical shooting rate over the study period-unless there is an indication that this rate may bear a significant decline or increase.

Part 2 of the Guide helps investors identify threats to hereafter growth by evaluating the efficiency and effectiveness of a company's management.

ServiceMaster's operating profit margin (OPM) across the study period exhibits no significant favourable or unfavourable run (note: it is typical for companies in the service industry to have a relatively small OPM)

Overall, the fault ratio has been declining--largely because shareowners' equity has been increasing steadily, particularly in latter years. Continuation of this run would tend to reduce interest cost and create unused debt capacity.

Due to its partnership texture and share repurchases, ServiceMaster has had an exceptional ROCE history during the consideration period. Earnings from 1986 to 1990 go beyonded the shareowners' equity level thereby creating the unusual situation where ROCE was in exces of 100% Although the modern trend in ROCE is down, the of the same heights are still quite high.

Because the data in Part 2 of the Guide do not indicate a threat to hereafter EPS growth, the A brains projects growth at 1S% (the historical rate) through the next five years. Although this taste grows EPS faster than receiptss it is considered reasonable since ServiceMaster has historically experienced this situation. This projection follows in an EPS estimate of $364 in five years.

(b) High P/E in Five Years

When selecting a High P/E in five years, the default mother-wit is often to choose the average High P/E from one side of to the other the study period--unless there is an indication of a fresh trend towards a higher or lower P/E Because no in the same state [i]or[/i] condition trend is evident in Part 3 of the Guide, the average high E through the study period (16.7X) has been culled for the calculation of the A notion High Price.

The 1999 EP projection of $364 and High P/E of 167X yield an estimated High Price of $6079 by means of 1999 (see Part 4A).

The Possible reasonable Price

Part 4B of the Guide provides several alternatives for calculating the possible reasonable Price for a stock in five years. Here, the A sentence provides for a 20% decline in ServiceMaster's latter stock price to $21.30 (see Part 4B(c))