Description
Aramark fell 20% following its investor day on 12/11/18 and is now down 35% for the year. Why the big drop (aside from the general market swoon this December)? Aramark apparently holds an investor day every three years to provide long term forecasts and while the street was expecting three year 3%-5% top line guidance, the company instead changed its organic revenue target for both 2019 and its three year plan to 2%-4%. Management also rebased and slightly lowered historical earnings numbers so that +10% EPS growth guidance (at the midpoint) would be measured off of a lower base ($2.11/share instead of $2.25/share).
On a relative basis Aramark tends to trade about 10% more expensive than the S&P500 and its multiple is now 20% cheaper (or two standard deviations below). On a fundamental basis, the shares today trade below their level three years ago (before their last investor day in 2015) despite 42% higher EPS ($2.23/$1.57-1), similar debt levels (4.1x Net Debt / F18A EBITDA) and a relatively similar three year outlook.
VRQP99 did a good write up in late 2015 that I recommend reading along with the latest release and the investor day deck. In brief, Aramark's core businesses are cafeteria and concession outsourcing, uniforms, and facilities management (plant maintenance and grounds-keeping). Their 274,000 employees service 1,400 colleges, 1,100 health care facilities, 144 professional sports teams, and 1,400 buildings. Aramark also operates 389 laundry facilities and a fleet of trucks supporting 3,900 pickup and delivery routes. They have a 94% customer retention rate for their services and an average client relationship of ten years. Sales are split ~80%/20% US/rest of world and they operate on a September fiscal year end. They negotiate directly with major food suppliers directly and pay Sysco largely for delivery.
The company spent $2.2bn ($1.3bn for Avendra and $910mm for AmeriPride) for a total of ~$700mm of annualized sales, or about 4% of overall company revenue. AmeriPride and Avendra contributed $400mm and $120mm of sales, respectively in F2018 (i.e. nine months of sales per purchase accounting).
Free cash flow for the full year 2018 was $429mm, including $135mm for one-time merger costs. Adding back the $135mm we get $564mm for the full year. 2019 free cash flow guidance of $500mm includes another $100mm of one time charges. Three year cumulative free cash flow guidance is $1,750mm with $500mm in the first year -- implying $625/year in the two remaining years. So, on a pro-forma basis, free cash flow looks like $564mm, $600mm, $625mm and $625mm. We could trend the last two years instead of assuming they are flat, but perhaps the point is that ~$600mm of free cash earning power on a $7.1bn market cap makes for a reasonable yield in a stock that is traditionally overpriced for most value investors.
Valuation
The company just closed on the sale of its HTC segment to TRIMED for $300mm on 11/9/18, after the fiscal year end Sept. 30th balance sheet date. $250mm will be used to repay debt and $50mm to repurchase stock. In the F4Q18 earnings announcement the board also raised the quarterly dividend 5% to 11c/share. Below are the multiples updated to reflect the HTC disposition; it turns out they are not that far off the unadjusted multiples.
Last: $27.99
S/O: 254mm
Mkt Cap: $7,109mm - $50mm = $7,059mm
Cash: $215mm
Debt: $7,244mm - $250mm = $6,994mm [90% fixed rate, no significant maturities until 2024]
Net Debt: $7,029mm = $6,779mm
TEV: $13,838mm ($14,138 unadjusted)
F18A Adj EBITDA: $1,728mm - $35mm = $1,693mm
F18A PF FCF: $429+$135=$564mm - [(1-28%) x $35mm] = $539mm
TEV/EBITDA: 8.17x
Net Debt/18A EBITDA: 4.00 (targeting 3.0x by F2021) - 4.08x unadjusted
Mkt Cap/18A FCF: 13.1x (7.6% FCF yield) - 12.5x unadjusted or 7.9% FCF yield
Conclusion
Aramark down 35% on a 7% free cash yield looks interesting here, it's statistically cheap and the cause of the decline appears to relate more to Mr. Market's expectations in an unforgiving market backdrop than the company's long run ability to generate cash.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
Catalyst
The company should report again in early February, when we should get an update on the underlying fundamentals.