Elevating Profitability And Global Growth With Hospitality IQ And Calculated Market Exits

Key Takeaways

• Strategic share repurchase and contract exits boost profitability and enhance earnings per share growth.
  
• International expansion and AI innovation promote revenue growth, operational efficiency, and improved client retention.
  
• High leverage and international challenges may pressure margins and revenue, while exit from low-margin accounts could further impact revenue 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's new $500 million share repurchase program, backed by strong and predictable cash flow, is expected to be accretive to earnings and offset equity dilution, potentially enhancing EPS growth.
  
• The firm exited low-margin facility services contracts, such as those with Chicago public schools, enhancing overall profitability and positively impacting net margins through better retention and focus on higher-margin business segments.
  
• Strength in the international segment, with significant new business wins in markets like the UK, Germany, Canada, and Chile, suggests continued organic revenue growth and margin expansion through geographic diversification strategies.
  
• The launch of Hospitality IQ, an AI-driven applications hub, aims to drive operational efficiency and enhance client services, potentially improving net margins and client retention rates.
  
• The company’s focus on expanding global GPOs and optimizing supply chain operations by leveraging scale and sustainability solutions is expected to provide margin improvements and drive revenue growth.

Aramark Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Aramark's revenue will grow by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.5% today to 3.5% in 3 years time.
• Analysts expect earnings to reach $744.0 million (and earnings per share of $2.77) by about November 2027, up from $262.5 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.9x on those 2027 earnings, down from 38.2x today. This future PE is lower than the current PE for the US Hospitality industry at 24.3x.
• Analysts expect the number of shares outstanding to grow by 0.62% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.65%, as per the Simply Wall St company report.

Aramark Future Earnings Per Share Growth

Risks

• Retention was impacted by the exit of lower-margin facility services accounts, which could affect future revenue growth and earnings if similar exits occur.
  
• Inflation in Latin America is lagging behind improvements seen in other regions, potentially pressuring margins or revenue growth in that market.
  
• The increase in leverage, currently 3.4x with a goal to reduce to 3x, poses a risk if cash flows do not meet expectations, potentially impacting net margins and financial flexibility.
  
• Exiting contracts due to unprofitable terms or policy changes, such as the exit from Chicago public schools, might impact future revenue stability or growth.
  
• International competition and currency fluctuations, particularly in Europe and Asia, could affect net margins and earnings.

Valuation

• The analysts have a consensus price target of $43.1 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 $46.0, 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 2027, revenues will be $21.0 billion, earnings will come to $744.0 million, and it would be trading on a PE ratio of 19.9x, assuming you use a discount rate of 8.6%.
  
• Given the current share price of $38.02, the analyst's price target of $43.1 is 11.8% 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.