Partnerships With Arizona State University Athletics And Chef Daniel Boulud Will Expand Future Market Reach

Key Takeaways

• Strategic acquisitions and service expansions like Quantum Cost Consultancy Group and new partnerships aim to enhance revenue streams and market position.
  
• Emphasis on cross-border growth and operational efficiencies, including AI advancements, to drive international presence and margin improvement.
  
• Dependence on external factors, tariffs, and unforeseen events could introduce revenue volatility and impact profit margins and growth.

Catalysts

Provides food and facilities services to education, healthcare, business and industry, sports, leisure, and corrections clients in the United States and internationally.

• Aramark expects revenue growth to accelerate in the second half of fiscal '25, driven by new account wins, client retention, and an extra 53rd week in the fourth quarter, which could positively impact revenue.
  
• The company plans to expand its services, including new partnerships, such as Arizona State University's athletics and culinary capabilities with Chef Daniel Boulud, enhancing potential revenue streams and market positioning.
  
• Aramark's acquisition of Quantum Cost Consultancy Group aims to increase purchasing scale and supply chain efficiency, which may support improved net margins.
  
• Focus on cross-border growth and collaborations, evident in Aramark Korea's defense sector expansion and recognition in Chile, suggests a strategy to boost international revenue and market presence.
  
• Ongoing supply chain management improvements, combined with leveraging automation and AI, are expected to deliver cost efficiencies, supporting net margin improvement and earnings growth.

Aramark Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aramark's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.9% today to 3.2% in 3 years time.
• Analysts expect earnings to reach $683.6 million (and earnings per share of $2.24) by about April 2028, up from $339.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $570.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.2x on those 2028 earnings, down from 23.7x today. This future PE is greater than the current PE for the US Hospitality industry at 21.8x.
• Analysts expect the number of shares outstanding to grow by 0.8% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.45%, as per the Simply Wall St company report.

Aramark Future Earnings Per Share Growth

Risks

• Exposure to potential tariffs on imports from China, Mexico, and Canada could increase food costs, impacting profit margins.
  
• Exit from certain facilities has already resulted in a 2% impact on top-line growth, which could continue to affect revenue if similar decisions are made in the future.
  
• Significant reliance on successful new business acquisitions to drive revenue growth could present a risk, particularly if client retention rates do not meet expectations.
  
• The impact of unforeseen events such as severe flooding in the Valencia region of Spain demonstrates potential risks to international operations and revenue.
  
• Dependence on external factors like team performance in sports and collegiate contracts can introduce revenue volatility, particularly in the sports and entertainment segment.

Valuation

• The analysts have a consensus price target of $44.595 for Aramark based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $49.0, and the most bearish reporting a price target of just $38.43.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $21.1 billion, earnings will come to $683.6 million, and it would be trading on a PE ratio of 23.2x, assuming you use a discount rate of 9.4%.
• Given the current share price of $30.39, the analyst price target of $44.6 is 31.9% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.