Editor's note: AI is touching just about every business... Even the ones you wouldn't expect. And that brings us to today's essay from our friend Joel Litman...
Even the ones you wouldn't expect. And that brings us to today's essay from our friend Joel Litman...
Regular readers will remember Joel. He's the founder and chief investment officer at our corporate affiliate Altimetry. There, Joel and his colleagues use a unique approach – called "Uniform Accounting" – to dig deep into corporate earnings and offer a unique perspective on stocks and the markets.
Today's essay was originally published in the October 2 edition of the free Altimetry Daily Authority e-letter. In it, Joel talks about an unexpected winner from the AI data-center build-out...
The AI Boom's Hot New Caterer
By Joel Litman, chief investment officer, Altimetry
The company behind your stadium hot dog just became an AI stock...
Food-service giant Aramark (ARMK) runs dining halls, arenas, and hospital cafeterias. But lately, it has been feeding a new customer... the crews building AI data centers.
Last month, Aramark signed on to serve a workforce community of up to 4,000 trade workers at a new AI data center in Texas. That means meals around the clock, housekeeping, gyms, and even "resort style" entertainment.
It sounds like overkill for a construction site. But electricians and plumbers are scarce. Developers are competing to keep them.
Microsoft (MSFT) President Brad Smith called the electrician shortage the single biggest obstacle to the company's U.S. data-center expansion.
And Aramark CEO John Zillmer told an investor conference last month that the U.S. could be short about 500,000 skilled laborers by 2028.
For Aramark's part, it expects $400 million to $500 million in added revenue from data-center contracts in fiscal 2027 and 2028. It has raised its guidance twice this year.
The market has noticed, bidding shares up more than 45% this year. It has more than doubled over the past five years.
Here's the thing – it's true that these AI contracts are a boon for Aramark. But folks hoping to ride the stock higher might have missed the boat.
It seems investors have already cashed this check... and there isn't much left on the table for stragglers.
Data-center crews pay well, but they don't stay forever...
Record AI debt. Rising interest rates. Stalled data centers. Wall Street firms are backing away. On October 15, Marc Chaikin and Joe Austin will reveal why the AI boom now resembles the 2008 crisis – and the exact steps to take now during the "AI in Crisis" event. Sign up today.
Aramark earns money for each person it feeds and houses. So more workers on a site means more revenue.
But when construction wraps up, most of the crew moves on... and so does all that revenue.
Citi analyst Leo Carrington told Bloomberg that caterers' data-center revenue is "effectively linear" to headcount. That means as projects near completion, revenue will drop alongside the number of workers.
Meanwhile, the clock is ticking for data-center caterers.
Bloomberg's research arm expects the whole market to peak at about $3.2 billion per year in 2032 – then shrink by half as the building frenzy slows.
Aramark's slice tops out around $1.2 billion per year in 2033.
Investors are right that data centers brought in some cash for Aramark. But the company already generates nearly $20 billion annually. Even at the peak, these AI contracts would add less than 6% to sales.
So while we agree that Aramark is an interesting beneficiary of the AI revolution, we don't expect to see anything transformative in its numbers.
Investors disagree, though – they think the business is booming...
At Altimetry, we can see this through our Embedded Expectations Analysis ("EEA") framework.
The EEA starts by looking at a company's current stock price. From there, we can calculate what the market expects from the company's future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
Aramark's Uniform return on assets ("ROA") held steady around 20% from 2014 through 2018. Then the pandemic shut down stadiums and college campuses.
Uniform returns crashed to 4% in 2020. They've been climbing back ever since, reaching 15% last year. Wall Street analysts expect Aramark's Uniform ROA to hit 17% this year and 20% next year.
That's already an impressive rebound. But at today's price, investors expect Aramark's Uniform ROA to reach 21% by 2030.
That would be its best level since 2018. Take a look...
In other words, the market is assuming analysts are right about next year... and then some.
They're convinced Aramark will hold on to those gains even after data-center crews go home.
Aramark earned its seat at the AI table...
But investors already paid for it. That growth won't last forever. And it's just a small slice of a $20 billion business.
After a 45% run this year, the stock is priced for far too much. We doubt Aramark's returns will get back to where they were before the pandemic – at least, not from the AI boost alone.
At today's price, the good news is already baked in.
Regards,
Joel Litman Editor's note: Plenty of stocks have posted incredible gains amid the AI boom...
But now, the AI bull market is facing a major crisis. And while it could spell disaster for folks who aren't prepared, it could also prove to be a massive moneymaking opportunity – if you know the tiny group of stocks that will benefit from the crisis ahead.
This Thursday, October 15, at 10 a.m. Eastern time, our founder Marc Chaikin and senior analyst Joe Austin are going on camera for a special broadcast. In it, they'll reveal a powerful breakthrough that can help investors discover the top 5% of stocks that are poised to soar.
As Marc and Joe say, cracks are showing up in the AI market. And this tool helps investors separate the winners from the losers.
— According to the Chaikin Power Bar, Small Cap stocks and Large Cap stocks remain somewhat Bearish. Major indexes are mixed.
* * * *
Sector Tracker
Sector movement over the last 5 days
Staples
+4.16%
Utilities
+4.15%
Energy
+4.03%
Real Estate
+3.07%
Health Care
+2.76%
Financial
+2.17%
Discretionary
+1.68%
Materials
-0.12%
Communication
-0.14%
Industrials
-0.56%
Information Technology
-2.27%
* * * *
Industry Focus
Aerospace & Defense
0
25
20
Over the past 6 months, the Aerospace & Defense subsector (XAR) has underperformed the S&P 500 by 31%. Its Power Bar ratio which measures future potential is Very Weak, with more Bearish than Bullish stocks. It is currently ranked #21 of 21 subsectors.
Indicative Stocks
ACHR
Archer Aviation Inc.
FLY
Firefly Aerospace Inc.
HXL
Hexcel Corporation
* * * *
Top Movers
Gainers
FICO
+10.85%
MDT
+3.90%
VYLR
+3.75%
ZBH
+3.40%
META
+3.38%
Losers
CIEN
-9.95%
LITE
-9.78%
COHR
-7.87%
CVNA
-6.62%
BE
-6.50%
* * * *
Earnings report
Earnings Surprises
No significant Earnings Surprises in the Russell 3000.
* * * *
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