Aramark At An Inflection Point For Pricing Growth - Goldman Sachs Is Bullish

Goldman Sachs analyst Lizzie Dove initiated coverage on the shares of Aramark ARMK with a Buy rating and a price target of $33.

The analysis of food input prices shows that it typically takes 18 months before caterers have managed to fully pass through inflation, suggesting that ARMK is on the precipice of an inflection point for pricing growth, says the analyst.

ARMK's segment exposure analysis shows that Education, Corrections and Healthcare segments typically face a longer-catch up, which would suggest upside in F24-25, writes the analyst.

The market may be under-estimating ARMK's revenue growth runway in the analyst's view.

The first-time outsourcing now represents about 50% contract wins versus 30% pre-COVID, a trend which the analyst expects to continue as clients prefer the simplicity and cost-savings that come with outsourcing.

ARMK's net new business has grown significantly from ~$96 million on average from 2016-2020, to an average of more than $500 million for the last three years. 

As these wins come up the curve to profitability, the analyst expects positive flow-through to margins. 

The analyst believes that ongoing deceleration in the CPI food away from home index would provide upside to ARMK's F2024 margin outlook.

The analyst's U.S. Macro economic team expects five 25 basis point rate cuts in 2024 starting in March.

As a result, the analyst expects ARMK to benefit from lower variable interest rate costs and a higher investor appetite for levered stocks. 

The analyst views Aramark as well positioned to deliver on consistent mid to high single digit organic revenue growth over the medium term, given a well-defined runway to benefit from continued moves towards outsourcing.

Also, the analyst sees ARMK's ability to achieve its margin targets as the key bull case for the stock.

Price Action: ARMK shares are trading lower by 0.36% at $28.85 on the last check Wednesday.

Photo via Wikimedia Commons