Aramark (ARMK) reported Q4 2017 earnings of $.54 up 9% y/y. Sales were up 2% organically, missing analysts’ expectations of 3%+. Hurricanes dragged down results, especially uniform operations in Puerto Rico. Dividend was increased modestly. Price Target unchanged at $43.
Yesterday, ARMK fell ~14% on earnings results as investors were frustrated by weak sales growth especially in NA Food Services. While the company has announced several new large food service contracts this summer, they have not yet impacted the top line. We believe the thesis is intact and that sales growth will increase in 2018.
Current Price: $40 Price Target: $43
Position Size: 2% LTM Performance: +10% (purchased mid-March)
Thesis Intact. Key takeaways from the quarter:
1. Organic growth +2%. EPS + 9%. Margins -20bps Y/oY
a. Growth expected to accelerate in 2018; driven by new business wins and lapping a tough comp
b. Free cash flow of $520m
c. 2018 EPS outlook given – range of $2.10 to $2.20 per share
d. Organic Segment revenues: North America +1%, International +10%, and Uniforms +1%. Strong new business, retention trends, and lapping tough comps all bode well for stronger revenue growth for next year
2. ARMK is making progress on deleveraging and improving margins – coupled with low single digit top line growth this should drive double digit EPS growth and unlock a higher multiple
a. As deleveraging continues it will free up cash flow for increasing shareholder returns. ARMK pays a 1% dividend and has reduced shares by 1% y/y
b. Total trailing 12-month net debt to EBITDA was 3.5x, a 30 basis point reduction versus the prior year measurement.
3. Valuation: remains attractive relative to peers and the broader market. ARMK currently trades at 18x management’s 2018 EPS target
a. Valuation is supported by increasing shareholder yield, deleveraging, and a stable largely non-cyclical revenue base
The Thesis on Aramark:
1. ARMK is an industry leader in the food, facilities, and uniform outsourcing market. The market is large and growing supported by favorable outsourcing trends
2. Aramark has an opportunity to continue expanding margins driven by productivity initiatives and operating leverage. The stock currently trades at a trough multiple vs. the market and at a discount to peers which I expect to mean revert thanks to low double digit EPS growth for the next few years driven by margin improvement, deleveraging, and improving top line
3. ARMK is well positioned to weather economic cycles due to a diversified customer base and greater than half of their revenues coming from non-cyclical industries. As deleveraging continues shareholder returns should increase via dividend growth and buybacks