Current Price: $35 Price Target: $43
Position Size: 2% TTM Performance: -11%
Aramark missed consensus, but the stock was up on strong organic growth and solid margins. They will update 2019 guidance at their investor day in a few weeks.
Key Takeaways:
· Aramark reported 4Q18 earnings, missing on the top and bottom line, though full year adj. EPS of $2.25 was at the midpoint of their guidance.
· Despite the miss, the stock was up because the organic growth was strong and they hit their margin target. The miss was largely driven by currency and the negative impact of natural disasters – mostly wildfire related.
· Constant currency sales grew 8% in the quarter. This increase was composed of 5% from acquisitions (about three quarters of which was from AmeriPride) with the remaining 3% growth generated by their legacy business.
· Last quarter they raised organic revenue growth guidance from 3% to 3.5% and they delivered. The Q4 +3% organic growth put full yr. organic growth at 3.4%
· Heading into the 2nd half of the year, guidance was heavily back-half weighted.
· Excluding natural disasters and currency, they hit their target of 100bps operating margin improvement that they set at their investor day in 2015. They did this through reductions in food, labor and SG&A expense.
· They have their next investor day coming up on December 11. Management is not providing specific guidance until then.
· Retention rate remains strong in mid-90’s.
Valuation:
· On a P/E basis they trade at a discount to peers, history, and the S&P 500.
· They trade at almost a 6% forward FCF yield.
· Increased dividend by 5% – about a 1% div yield.
· Balance sheet is pretty decently levered but should improve.
o With recent acquisitions leverage ratcheted up, but they’re now at 4.1x and target 3.5x by 2020.
o They have no significant maturities until 2024.
o 85% of total debt is fixed rate.
o 100bps increase in Libor means ~$10m in incremental interest expense. That’s ~$0.03 to EPS.
Thesis:
· ARMK is an industry leader in the food, facilities, and uniform outsourcing market. The market is large and growing supported by favorable outsourcing trends.
· 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.
· 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.
$ARMK.US
[tag ARMK]
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
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