Shares of Aramark (NYSE:ARMK) finished 12.9% higher on Wednesday, after the company reported better-than-feared preliminary second-quarter results. While its revenue is being hurt by the coronavirus shutdown, investors were encouraged by the results.
Additionally, the company announced favorable terms to raise $1.25 billion in liquidity.
Aramark provides food services, facilities management, and uniform laundry services around the world. Most of these services have been hurt due to the COVID-19 pandemic, but perhaps not as much as one might expect. Preliminary Q2 revenue of $3.7 billion is only down 8% year over year, but down 14% sequentially. All things considered, it's holding up well.
However, Aramark currently has a net debt position of $6.8 billion, and Wall Street is worried about balance sheets during this economic crisis. This explains why shares are still down 46% year to date even after today's rally.
Many companies have made moves to improve financial flexibility, but not all have been on favorable terms. For example, food-service company US Foods Holdings just announced $500 million in convertible preferred equity. The terms include a 7% dividend and the option to convert to stock at $21.50 per share, diluting shareholder value.
Aramark's $1.25 billion debt offering is for unsecured notes due in 2025, avoiding dilution. And the company has no significant debt maturities until 2023, suggesting it can fully operate until COVID-19 passes.
Investors with a long-term mindset should take today's news for what it is: Aramark is surviving the coronavirus crisis. While encouraging, it's not an indication to rush out and buy the stock. The top stocks for our investing dollars often have strong balance sheets and cash-flow generation, qualities Aramark is lacking. Today's pop is nice, but I wouldn't pick it to beat the market long term.