UBS sees margins improving at Aramark, upgrades stock to Outperform

UBS upgraded Aramark (NYSE:) to a Buy rating (From Neutral) and reiterated their 12-month price target on the stock of $43.00 as analysts believe the American food service provider is approaching margin inflection.

The analysts wrote in a note, “we believe Aramark is approaching margin inflection in FQ4 (Sept) with average gross margin expansion potential of nearly 200bps yoy over the next four quarters.”

The growth is being influenced by a decrease in food inflation, as specific components of food expenses appear to be declining in the United States in the upcoming period. At the same time, Aramark is actively introducing higher prices in specific sectors where pricing has not kept up with overall inflation. This strategic adjustment in pricing is fostering a better balance between prices and costs, which is expected to contribute to a recovery in gross margins.

If ARMK were to fully achieve this goal, the analysts believe it would result in the company posting upsides to street estimates. Meanwhile, the stock’s ~15% pullback over the past month creates an attractive opportunity relative to the UBS price target.

UBS has revised its short-term margin predictions for the stock to account for a more advantageous price-cost situation. As a result, the projected EPS for the fiscal year 2023 has been adjusted upward from $1.70 to $1.72, and the estimated EPS for the fiscal year 2024 has been raised to $2.40 compared to the previous $2.32. This adjustment is attributed to an improved AOI margin, which is now at 6.3%, representing a 20 basis points increase.

Shares of ARMK are up 2.11% in mid-day trading Tuesday.