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When shares of Aramark (RMK
) started dropping in early September -- from $23 to as low as $18 by Oct. 10, partly because of the general market's drop -- a number of big stakeholders, including Fidelity Management, Janus Capital, and Massachusetts Financial, took advantage of the decline and bought more shares. Fidelity upped its holding by 1.5 million shares, to a 10.3% stake, and Mass Financial added some 591,0000 shares, increasing its stake to 6.3%. The stock has since rebounded to $21 on Nov. 18.
What's so attractive about Aramark? Outsourcing has become a huge money-making business as companies realize it's an effective cost-cutting tool. And Aramark, which climbed to a 52-week high of $28 on May 1, 2002, is a leading pure play in outsourcing. Analysts expect revenues to shoot up to $9.6 billion in fiscal 2003 (ending Sept. 30), up from $8.7 billion in 2002. Aramark is a major provider of food service, uniforms, and health- and child-care services to a wide variety of customers in business, health care, education, sports, and entertainment.
Food service accounts for 65% of fiscal 2002 revenues, health care about 17%, and sports and entertainment 15%. One area of potential growth is overseas, which Aramark believes is still underserved. It generates some 85% of sales from North America and most of the rest from Europe.
"IMPRESSIVE." The stock is undervalued "based on a sum-of-the-parts" estimate, as well as on "a straight discounted free cash-flow valuation of the enterprise as a whole," says analyst Adam Waldo of Lehman Brothers, who gives Aramark an overweight rating. On the "private market value" of its units, Waldo comes up with a 12-month price target of $34, and $31 based on his discounted free cash-flow model.
Aramark posted solid fiscal fourth-quarter results that either beat or matched analysts' estimates. "Comparable earnings-per-share growth at 18% was impressive," says Goldman Sachs analyst Carey Callaghan, "driven by accretive acquisitions and operating and financial cost savings." The results were notable because they were achieved during a weak economic environment, notes the analyst, who raised earnings estimates for fiscal 2003 to $1.35 per share from $1.32. In 2002, Aramark earned $1.18, notes Callaghan, who rates the stock outperform.
Analyst Chris Gutek of Morgan Stanley (who also expects Aramark to make $1.35 per share in fiscal 2003) sees earnings of $1.58 in fiscal 2004 on sales of $10.3 billion. He gives the stock an overweight rating.
STRONG GROWTH. Lehman's Waldo notes that Aramark has consistently outscored the S&P 500-stock index over the years. The key behind such a performance, he says, is its ability to sustain organic annual revenue growth of 5% to 6% or better from 1998 to 2001. He argues that such growth could also be achieved in the coming years by stronger unit pricing, faster launches of new services, and greater progress on cross-selling its services.
Compared with its rival Cintas (CTAS
), a major player in the domestic uniform-rental and direct-sale marketing, Aramark shares are undervalued, Waldo believes. Cintas, he says, trades at a 50% premium to its private-market value.
One issue that has been spooking investors, says Waldo, is the Dec. 6 expiration of the lockup period on Aramark shares held by several big institutions. This overhang stems from Aramark's initial public offering on December 18, 2001. Before the IPO, Aramark was owned by ARA Group, which had acquired it in a leveraged buyout. Members of that group own a big chunk of the company, and some 37 million shares are due to become unrestricted on Dec. 6 and could be unloaded.
BUYBACK OPTION. Management says this block is small compared to the 80 million shares that were unlocked on June 10 by insiders. Aramark Chairman and CEO Joseph Neubauer didn't sell any shares then, and he has indicated that he won't sell in December. Aramark now has 61 million shares outstanding. But Waldo doesn't view the Dec. 6 expiration as a material risk to Aramark's investors -- even on a short-term trading basis. He says this is particularly true because Aramark is still authorized to repurchase 5.7 million of its shares.
Analysts concede that the outsourcing business is heavily influenced by employment levels, which have been in a slump. But even during this economic downturn, Aramark has managed to do well, argues Waldo. He and other analysts say once the economy revives, Aramark should thrive even more, especially with businesses of all kinds so keen on finding ways to enhance productivity and curb costs.
Copyright 2002, by The McGraw-Hill Companies Inc. All rights reserved.
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