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. (NDLS 8.08%) 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 (PBPB 1.13%), 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.
