With the stock market's daily fluctuations, investors are constantly seeking clarity on the true value of their investments. Aramark (ARMK, Financial) recently experienced a notable daily loss of -8.17%, with a 3-month gain (loss) of -4.47%. Despite these movements, the company presents an Earnings Per Share (EPS) of 2.07. This article aims to determine whether Aramark's current stock status reflects an opportunity for value investment—is the stock modestly undervalued? The following valuation analysis will provide insights into Aramark's financial health and intrinsic worth.
Company Introduction
Aramark provides a suite of services including food, facilities, and uniform services to various clients across North America and internationally. The company's revenue primarily stems from its North American food and support services segment. With a complex portfolio catering to educational institutions, healthcare facilities, correctional institutions, and entertainment venues, Aramark's business model is diversified across multiple streams. This diversification is critical when assessing the company's resilience and potential for growth. Currently, Aramark's stock price stands at $26.19, with a market capitalization of $6.80 billion, juxtaposed against a GF Value of $35.4, hinting at potential undervaluation.
Summarize GF Value
The GF Value is a unique metric that comprehensively assesses a stock's intrinsic value. It incorporates historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and projections of future business outcomes. This value serves as a benchmark for fair trading, with the stock price expected to oscillate around this line. When a stock price significantly surpasses the GF Value Line, it may be overvalued, potentially leading to subpar future returns. Conversely, a price well below this line could indicate undervaluation and the prospect of higher future returns. Given Aramark's current price of $26.19 per share and a market cap of $6.80 billion, the stock appears modestly undervalued against the GF Value.
Because Aramark is relatively undervalued, the long-term return of its stock is likely to be higher than its business growth, presenting an attractive proposition for investors.
Link: These companies may deliver higher future returns at reduced risk.
Financial Strength
Investing in companies with robust financial strength mitigates the risk of permanent capital loss. Aramark's financial strength can be assessed through ratios such as cash-to-debt, which currently stands at a less than ideal 0.05, ranking lower than 91.69% of companies in the Business Services industry. This figure leads to a GuruFocus financial strength rating of 4 out of 10, indicating a need for caution when evaluating Aramark's balance sheet.
Profitability and Growth
Profitable companies, especially those with a consistent track record, are typically safer investments. Aramark has maintained profitability for 8 out of the past 10 years. With a revenue of $18.30 billion and an Earnings Per Share (EPS) of $2.07, its operating margin stands at 4.27%, which is lower than 58.05% of its industry peers. This results in a profitability ranking of 6 out of 10, reflecting a decent level of profitability.
However, growth is a critical factor in valuation, as it is closely tied to long-term stock performance. Aramark's average annual revenue growth rate is -0.7%, which is less than stellar compared to its industry. Moreover, the 3-year average EBITDA growth rate of -8.8% is lower than 82.45% of companies in the Business Services sector, suggesting potential concerns regarding Aramark's growth trajectory.
ROIC vs. WACC
Comparing Return on Invested Capital (ROIC) against the Weighted Average Cost of Capital (WACC) is another method to gauge a company's profitability. Aramark's ROIC over the past 12 months is 4.72, which is below its WACC of 7.81. This indicates that the company may not be creating value for its shareholders, which is a red flag for investors.
Conclusion
In summary, Aramark (ARMK, Financial) is estimated to be modestly undervalued. The company's financial condition is poor, and its profitability is fair, but its growth is lagging behind a significant portion of its industry peers. For those interested in a deeper dive into Aramark's financials, you can explore its 30-Year Financials here.
To discover high-quality companies that may deliver above-average returns, please check out the GuruFocus High Quality Low Capex Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
