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Aramark: America’s Bidcorp

US investing is not all about the FANGS.

This article was first published in the July issue of the Moneyweb Investor. Click here to read the magazine in full, at no cost to your pocket.

While investors are chasing the high-flying and often expensive tech stocks in the US, there are many companies that don’t attract such fashionable attention, but which nevertheless produce long-term sustainable growth in earnings.

Philadelphia-headquartered Aramark appears to be one of them. It is a diversified consumer services company with its three offerings being in food, facilities and uniforms. 

To understand the huge scale of industries that it operates across, a quick list of the client base shows: education (universities/schools); healthcare (hospitals/healthcare sites); sports (stadiums/amphitheatres – the company has fed hundreds of thousands of athletes at 16 Winter/Summer Olympic Games events since 1968): leisure (national parks/museums); correctionals/prisons; workplaces that are conventional (office/manufacturing) and remote (rigs/drilling camps); and conference and convention centres. That’s a vast range with customers using anything from one to all three of the core Aramark offerings.

Aramark’s roots go back to the 1930s and after being taken private in a leveraged buyout by former chairman Joe Neubauer in 2007, Aramark came back to the main board of the NYSE, for the third time, in December 2013.

Its core market is North America, supplemented by an additional 17-country footprint in many of the fastest-growing global geographies. North American food and facilities services account for around 70% of revenues; international food and facilities make up around 20%; and 10% of revenue comes from the uniforms business.

Being a predominantly dollar-based operation, recent volatility in the USD might be perceived as having an impact on the group’s earnings. “Not so,” says Kate Pearlman, VP Investor Relations at Aramark. “The currency only comes into play in accounting translation gains or losses from our overseas operations. At an operational level, everything is sourced locally, including labour.”

Although it doesn’t have a directly comparable competitor in the US, Compass comes closest in terms of activities. A similar competitor in the food service space is Sodexo. And while Aramark is relatively small, with a market capitalisation of around $10 billion, it has lots of moving parts, which can make it more difficult to analyse than a sole product company.

A consumer services operation such as Aramark enjoys what is effectively annuity income. With such a diverse client base, and as long as the company delivers on its customer promises, income from all these sources should be regular and sustainable.

Trevor O’ Callaghan, lead portfolio manager at Old Mutual Wealth Private Client Securities, points out that the company seems particularly well-placed to benefit from changing spending patterns as demographic and other shifts occur in America and around the world. “Retailers are shrinking their bricks and mortar premises as shoppers move online, and this space is now being taken over by the restaurants in these shopping malls, so food and facilities services companies will be beneficiaries of this trend.”

O’ Callaghan highlights that “Aramark’s exposure to the leisure sector is also likely to benefit from the preference by so-called ‘millennials’ to have ‘experiences’ rather than own material goods”. A substantial portion of Aramark’s revenue comes from the leisure and education industries.

The uniform business is currently taking strain due mainly to the sheer number of players in this sector, adopting cut-throat price-cutting strategies. Revenue per pound (weight that is, and the main metric used to measure growth in this line of business) is declining. Aramark’s strategy here is to tough it out until industry consolidation results in a more stable operating environment, as smaller players get edged out and the attrition continues. With an operating profit margin of almost twice that of its other businesses, Aramark can afford to wait while the uniform sector settles down.

Under the aegis of current chairman and CEO Eric J Foss, Aramark is slowly but surely shedding its parsimonious private equity hangover and establishing a sustainable revenue and earnings growth trajectory. Foss committed to adding an extra 100 basis points of operating profit margin to the business from financial 2016 through by financial 2018, at which point it will be on the same level of profitability as Compass, i.e., at a 7.2% adjusted operating profit margin. He has already been responsible for delivering substantial improvements in margins.  

“We’re catching up on internal reinvestments,” says Pearlman. “Until Eric Foss arrived, the business had been underinvested in and we have been busy removing the legacy of that relating to the previous private equity ownership”. To endorse this view, Pearlman points out that the decades-old DOS-based payroll system will soon be replaced.

Management is now enjoying huge efficiencies thanks to proper operational investments, and this is happening at a time when the group is also being refinanced. “We have a clear line of sight to growth in 2018 and beyond, and it’s a measured approach,” says Pearlman.

“This is a nice stock” says Old Mutual’s O’ Callaghan. “It’s the Steady Eddie and a perfect foil to the FANGs (Facebook, Amazon, Netflix and Google).”

The stock has risen by almost 15% year to date, compared with an 8.2% rise in the S&P 500 during the same period.

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