Aramark stock has had a good year so far, up over 40%. The company is riding recent industry trends. Some fundamental changes have set it up well for an extended bull run. On top of this, the company is a potential acquisition target, making it hard for analysts to value the true potential of the company.
Aramark is in the food catering industry. It serves businesses in various sectors of the economy, including education, business, healthcare, and sports and leisure events among others. There are two main ways the company makes money: by offering its catering and dining services and by maintaining and operating various facilities for businesses.
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As already mentioned above, the company’s end users are businesses that need to outsource their management and catering tasks. This allows these businesses to focus on their own operational efficiency without worrying about how to look after their employees or how to manage their facilities.
Some of the company’s well-known clients include Walmart (WMT), Cleveland Clinic, The University of California, and Major league Basketball teams. By serving such clients, Aramark has become one of the top three food catering service providers in the world.
Aramark’s bull thesis revolves around two fundamental factors: economies of scale and pricing power. Both of these go hand in hand. The company is actively pursuing expansion of its operations. This will help the company improve its volumes. Once that happens, it will be able to negotiate better prices for the food it procures. By serving more and more clients, the company will also be able to efficiently utilize its labor, thus reducing fixed costs as a percentage of its operational costs.
Once the company achieves its expansion plans, it can then get on to working on its pricing power. Aramark has this unique advantage that by negotiating lower raw material prices, it can pay the same amount of money for high-quality food products that smaller catering companies will need to pay for relatively lower-quality products. As a result, Aramark can sell its products at a premium, knowing its competitors cannot offer the same quality for the same price. This pricing power gives the company a huge advantage against its smaller competitors.
Speaking of competition, the company is also a potential acquisition target. Its main competitor, one of the top 3 catering service providers in the world, Sodexo is trying to acquire Aramark. The acquisition would not only give the French company a business that is primed for upside due to solid fundamentals but would also give it a chance to expand into international markets. This unique position is driving positive sentiment in ARMK’s stock, making it such an attractive buy. However, the real upside could still be ahead of us if Sodexo makes a bid for the company.
Aramark ranks 1st on our latest list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 33 hedge fund portfolios held ARMK at the end of the second quarter which was 31 in the previous quarter. While we acknowledge the potential of ARMK as a leading AI investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as ARMK but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
