Aramark

Aramark posted 9% organic revenue growth in its fiscal third quarter, driven by continued strength in its base business and new business wins. It raised its 2026 organic growth outlook to 9%-10%, now factoring in the contribution from its first data center site. Shares rose 10% intraday on Aug. 11.

Why it matters: On top of continued strong organic growth, we see Aramark as well positioned to benefit from the data center boom, as its integrated service offering should help operators looking to attract and retain workers at remote sites. Aramark's first Texas hyperscaler site began generating revenue late in the third quarter and will contribute for the full fourth quarter. Given the capital-light, cost-reimbursable contract structure, management expects the project to be immediately margin-accretive. The pipeline remains strong, with two additional sites expected to mobilize by the first half of 2027 and another five under discussion or development across hyperscaler and co-location customers.

The bottom line: We maintain our $47 fair value estimate for no-moat Aramark. We see the shares as overvalued.

Between the lines: Initial projects are also expanding in scope. Management now expects activity at its two hyperscaler sites to be about 40% larger than initially anticipated, implying annualized revenue of roughly $140 million and $160 million, respectively.

Big picture: The data center opportunity is vast, with several hundred projects potentially being built over the coming years. While Aramark's first-mover position should support early wins, we expect competition to increase as other service providers enter the market.

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We are raising our fair value estimate to $47.00 per share from $40.00, corresponding to a forward enterprise value/EBITDA multiple of 11.4 times and a 2026 EBITDA of $1.5 billion. The change is driven by improved revenue from new data center opportunities.

We anticipate revenue growth of 7.5% over our forecast period, above the long-term average of 4%, excluding the disposal of the uniform business. Driving higher revenue is the new opportunity in data centers, with our base case forecasting Aramark to win 15 contracts by 2030, each worth $100 million. Further contributing to the higher levels are changes to sales incentives and staff, as well as industry tailwinds such as inflation and supply chain disruptions, which should lead to a higher rate of business wins from self-operators and small caterers.

We still see slight margin increases during our forecast, thanks to the maturation of new business contracts secured during the past three years of rapid growth. Margins improve over the contract's lifespan as the learning process increases efficiency and yields cost savings, benefiting Aramark in the later years of our forecast. Aramark is also increasing its purchasing power, decreasing food costs, and improving margins. Finally, data center contracts are margin-enhancing and should further drive margin growth.

We assign food caterer Aramark a no-moat rating. While Aramark has many attributes of a switching-cost moat, such as long-term contracts, global scale, and client time and monetary costs associated with mobilizing to fit a kitchen for service, it has been unable to deliver returns on investment above its cost of capital. Similarly, Aramark has been unable to leverage its purchasing power to achieve a cost advantage and has failed to deliver returns on investment above its cost of capital.

Contracts for food services typically average seven years in length, which is longer than their peers, given the more robust education and sports segments, where contracts can be 10 to 20 years. Although the average is short of our 10-year hurdle for a narrow moat, retention rates have averaged 95% over the past decade.

Driving retention is the significant time and monetary investment required to switch foodservice providers. Mobilization at the beginning of a contract, the act of preparing the kitchen and dining area for service, can take three to 12 months, during which food services will not be provided. In some subsegments, such as hospitals, disruption is particularly costly because delivering food to sick patients is essential, and temporary replacements are typically unavailable. If the client pays for a kitchen fitout or refurbishment, switching foodservice providers would again incur similar costs and downtime.

Contracts also typically include capital expenditures from Aramark or from the client, both of which increase switching costs. In cases where Aramark must incur costs, switching costs are higher. In these instances, contracts tend to be longer, such as the new 20-year contracts with European sports clubs Barcelona and Everton. In the event the client incurs capital expenditures, switching costs still occur, as clients are less likely to switch providers after one contract, as they would need to incur similar capital expenditures again.

Another factor strengthening Aramark’s switching-cost advantage is its facilities management segment, which performs a wide range of tasks, including housekeeping, custodial services, and landscaping. Facility management contracts are often integrated with food services and frequently have a global scope. The greater the contract's complexity in terms of the services provided and scope, the higher the cost of nonrenewal. Only Sodexo offers a more comprehensive array of food and facilities management services globally, thereby limiting clients' options for replacing Aramark’s facility management services upon nonrenewal. While a single location may be able to obtain a low-skill local service for low cost, a conglomerate would need to replicate this process across every location in every country, a costly and time-consuming endeavor. An example of the value they provide: Aramark has partnered with a leading aerospace company since 1999, providing both food and facility management solutions. It also goes beyond commoditized facility services, such as cleaning or administrative work. Its energy efficiency program, for example, has reduced energy costs by 30% in recent years, demonstrating the additional value it provides over a standard local service.

Despite these high switching costs, which result in high retention rates, Aramark has been unable to leverage this advantage to generate returns above the cost of capital.

While it has superior scale over smaller caterers and self-operators, Aramark has not paired its scale with a high compliance rate to gain a cost advantage in food procurement over its similarly sized peers. Given the asset-light nature of the business, food accounts for a significant portion of costs, 25%. Food caterers can obtain substantial discounts from suppliers by aggregating demand through a group purchasing organization, or GPO, thereby gaining greater cost advantages and benefits when pursuing clients.

Aramark owns the Global Supply Chain Group and Avendra, its international arm, which has approximately $20 billion in purchasing power. While scale alone may yield cost savings relative to smaller competitors, it fails to do so against Compass. Compass owns the largest global GPO in the United States, Foodbuy, with $32 billion in purchasing power. It also has significantly higher member compliance rates, the rate at which members order from preferred suppliers, than their peers. If a high percentage of members are compliant, a greater proportion of orders comes from a single supplier. This increases the order size, enabling better terms and lower costs.

The Global Supply Chain Group does not focus on compliance; instead, it aims to achieve total purchasing volumes of $30 billion, comparable with its largest peers. As it stands, Aramark has achieved operating margins of 3.8% over the past 10 years, compared with 6.3% for Compass over the same period. While Aramark believes it can close the margin gap by increasing its volumes, we are skeptical it can do so without also increasing its compliance. As such, we do not anticipate it closing the margin gap during our forecast period, as its comparable scale is insufficient to match Compass, given Compass' strong compliance. In turn, we do not award Aramark a cost advantage moat.

Aramark’s food GPOs, Global Supply Chain Group and Avendra, are rapidly expanding their purchasing power, increasing the likelihood that they can close the margin gap with their global peers.

Economic tailwinds, such as high inflation and increasingly complex supply chains, increase the benefits of outsourcing food services, benefiting Aramark.

Employers are putting a greater focus on benefits outside of salary, increasing the importance of food services in Sodexo’s largest subsegment, business and industry.

Aramark’s food GPOs, Global Supply Chain Group and Avendra, have significantly lower compliance rates, which have led to historically lower margins compared with Compass and Foodbuy.

Greater adoption of work-from-home has permanently impaired the business and industry subsegment, which is most popular among younger workers.

Aramark has high negative exposure to the employment rate, most notably in the United States, leaving it vulnerable to an economic downturn.