Aramark attracts buy rating from Jefferies on expectation for sales and margins improvement

Jeffries upgraded Aramark (NYSE:ARMK) to Buy rating from Hold on the firm's expectation for organic growth of around 6% in FY24 and FY25. The growth is noted to be 2X the pre-COVID trend rate, driven by a successful multi-year turnaround effort and a step change in the industry’s outsourcing penetration rate post-COVID driving new business wins. "Importantly, margin expectations have been reset and lagging price dynamics in FY24 should provide a nice lift," updated analyst Stephanie Moore.

Jefferies' price target on Aramark (ARMK) applies a 9.0X multiple on the 2025 EBITDA estimate, which is observed to be a premium to Sodexo at 8X due to the better organic growth performance. The price target is a discount to best-in-class player Compass at 11X.

Moore and team believe that Aramark (ARMK) has successfully completed its multi-year turnaround effort which included an activist-driven change in management and an overhaul of its salesforce by increasing the number of boots on the ground, which had the effect of simplifying the process to sign up new businesses and create a customer first mindset. In addition, the altering of Aramark's (ARMK) incentive compensation structure to include net new business wins as part of the bonus plan and the removal of caps on commissions are both seen as positive developments. Jefferies also expects a material improvement in annualized net new business growth contribution due to the spinoff of the uniform business.

In terms of the macro backdrop, food inflation is noted to have moderated materially from the peaks seen in 2022, which is anticipated to provide a lift to margins. Jefferies conservatively assumes 40 points of margin expansion in FY24 and 50bps in FY25 as record new business wins mature and the reliance on temporary labor improves and productivity investments materialize.

Shares of Aramark (ARMK) edged up 0.16% in premarket trading on Monday to $24.64 after dropping to near its 52-week low last week.