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Is the Third IPO the Charm for This Food Sector Stock?

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The upcoming IPO of food services provider ARAMARK Holdings can be likened to the later stage of a multi-course meal. The listing -- slated to occur in the near future on the New York Stock Exchange under the ticker symbol ARMK, and at an expected range of $20 to $23 per share -- will be the third in the company's nearly 55-year history. Let's take a look to see if the dessert phase of the company's existence will be a tasty treat for investors, or if it might be best to leave the table instead.

Fresh from the kitchen
Some food-related IPOs have done brilliantly this year. Witness the double-and-then-some pop of carbohydrate purveyors Noodles & Co. (NASDAQ: NDLS  ) on that stock's debut trading day in July, as the stock surged from the $18-per-share issue price to more than $36. The stock is still flying high (at $39 and change), although it's down some from its nearly $52 peak.

That broadly matches the share performance of sandwich shop operator Potbelly (NASDAQ: PBPB  ) , which hit the market in October. Like Noodles & Co., this rotund guy did a double-plus on its opening day, closing at more than $31 per share against an issue price of $14. The stock is still hanging in there, trading in the $28 range.

ARAMARK Holdings operates in a different segment of the industry, so when compared to those two youthful upstarts it actually looks a little staid. Its bread and butter (sorry) is the provision of concession services for venues like stadiums and cafeterias, with a smaller business in uniform provisioning. It's much more mature than that pair of young foodies, and it lacks their sharp marketing and colorful branding. As a concessionaire, it largely works behind the scenes in places not necessarily associated with dining.

Dishing up black numbers
What ARAMARK Holdings does possess, however, is a steadily rising top line and consistent profits. The former reached nearly $14 billion in fiscal 2013, 3% above the 2012 figure and 7% higher than the 2011 result. Meanwhile, the company's net has been firmly in the black for four years in a row.

One thing to be acutely aware of is that the segment the company occupies is fairly specialized. As a concession operator, its offerings aren't expensive and it can't use classic restaurant tricks like cranking the prices of non-essentials (drinks, appetizers, and desserts) in order to fatten the profits. As a result its net margin is as thin as a knife, coming in at under 1% this past fiscal year.

Still, it's interesting to match the company against upstarts and investor favorites in the sector; this shows that for a certain stripe of investor, a veteran niche firm with skinny margins, steady top line growth, and reliable profitability might be a more attractive (and less risky) buy than a more famous or popular name. 

 Metric ARAMARK Noodles & Co. Potbelly Chipotle Panera Bread
Annual revenue (million) $13,946 $300 $275 $2,731 $2,130
2-year revenue growth 7% 36% 25% 49% 38%
Net (million) $69 $5 $24 $278 $173
Margin 0.5% 1.7% 8.7% 10.2% 8.1%
P/E TTM 13* 183 Neg. 53 27

Sources: The Wall Street Journal, Yahoo! Finance, Securities and Exchange Commission. *Net profit for 2013 fiscal year, stock price at the midpoint of the announced IPO range. TTM = trailing 12 months.

Those highfliers can be expensive. Noodles & Co. trades at an awfully rich 183 times earnings, a dizzying number for a company so young operating in such a challenging sector. The durable popularity of Chipotle Mexican Grill and Panera Bread over the past few years is reflected in their respective P/Es. These would still be well above ARAMARK's even if the older firm's stock were to rise on IPO day by, say, 50% or so to land in the early $30s (putting it at a P/E just under 20). 

The Foolish takeaway
Judging by the modest trailing P/E, ARAMARK Holdings' IPO looks well priced to bounce. In terms of financials, the company is a turtle compared to hares like Potbelly and Noodles & Co. It is, however, a veteran that has performed reliably over the last few years -- a steady, deliberate grower rather than a jumpy rabbit. As such, on IPO day its stock likely won't leap as high as some of its peers. But even at a modest pop, after first-day gains it might be a nice grab for bargain hunters looking to buy a reliable name at a relatively cheap price.

Only time will tell if a new issue like ARAMARK will be a keeper. One recent IPO, however, has not only done spectacularly but is well poised to do so far into the future. Our CEO, legendary investor Tom Gardner, has permitted us to reveal the name of this stock and two other long-term stars in "The Motley Fool's 3 Stocks to Own Forever." These picks are free today! Just click here now to uncover the three companies we love. 

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9/27/2016 4:03 PM
CMG $418.95 Down -0.93 -0.22%
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