Weekly Equity Idea Highlight - 2020 03 16
Market expectations for ARMK are currently very pessimistic. The market is expecting UAFRS-based (Uniform) ROA (ROA') to fade from 17% in 2019 and forecast 18%-19% levels in 2020 to 14% in 2024, with Uniform Asset growth at the low end of historic ranges.A combination of short-term concerns about coronavirus impacting their services business and long-term perceived competitive concerns is causing the market to price the company to see returns compress significantly. However, the company's returns have been stable thanks to its savvy investments and strategy the past six years, and after its CEO change to refocus its strategy in 2019, that return stability and improvement is likely to resume.
As importantly, management is aligned correctly to sustain growth above market expectations, while also maintaining and improving returns. Management's compensation framework already focused management on these key factors, and in the most recent year, the company changed compensation to focus management more on growth to guarantee that management focuses on taking share in its markets.
Also, management communication gives reason to believe the company is seeing stronger execution than the market is recognizing. During the Q4 and Q1 calls management showed confidence about strong earnings trends, growth trends, investments in the business, execution trends, and gaining share in one of their largest market opportunities, the facilities market.
Considering low market expectations and near-term significant pessimism, positive strategic tailwinds, management's intelligent strategy, and strong positive fundamental momentum for the company based on management's communication, there appears to be material near-term and long-term equity upside for ARMK.
Aramark is a provider of food, facilities and uniform services. The company manages its Food and Support Services (FSS) business in segments split between its United States and International operations. The company's FSS segments manage a number of interrelated services-including food, hospitality, procurement and facility services-for school districts, colleges and universities, healthcare facilities, businesses, sports, entertainment and recreational venues, conference and convention centers, national and state parks and correctional institutions. The company's Uniform and Career Apparel segment provides employee uniform solution, including design, sourcing and manufacturing, delivery, cleaning and maintenance.
In 2009, just as the dust was settling from the last major equity and credit market crises, we launched a boutique research firm with the intention of breaking Wall Street’s biases and broken incentives:
- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
- Stock analyst recommendations are not grounded in disciplined financial analysis
- Credit agencies have been set up to grossly fail in their responsibilities to investors and the public markets
- Utter lack of willingness of major research firms to employ the the most advanced forensic analysis available
We sought to provide investors and company analysts with a source of information that changed all that.
Many years later, our business model remains because little has changed on Wall Street.
- Corporate credit ratings remain years behind the fundamental underpinnings of company performance
- Stock analysts continue to make recommendations with deeply inherent biases
- Research firms have failed to break down the walls between credit, equity, and macroeconomic research
- The governing accounting bodies have created more leeway for mis-estimates and mis-classifications as financials have become unwieldy and overwhelming
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