Aramark beats Q2 estimates but valuation and leverage keep us on Hold

What happened

Aramark (ARMK) reported Q2 fiscal 2025 earnings of $0.49 per share, beating the Zacks Consensus Estimate of $0.47 and up sharply from $0.34 a year ago. Revenue also topped expectations, signaling continued momentum in its core food and facilities services business. However, the stock's P/E of 29.2 and EV/EBITDA of 26.3 remain elevated relative to a DCF-based intrinsic value of $8.94, while net debt/EBITDA of 4.11x and interest coverage of 2.36x point to a levered balance sheet. The beat is a positive data point, but it does not materially alter the risk/reward trade-off given the stretched valuation and execution risks from labor tightness and intense competition with Compass Group and Sodexo.

Implication

Aramark's Q2 beat reinforces that operational execution is on track, which could support gradual de-leveraging if sustained. However, investors should demand clearer evidence of consistent free cash flow generation and net debt/EBITDA trending toward 3.5x before upgrading to Buy. Until then, the stock remains a Hold with limited upside from current levels.

Thesis delta

The earnings beat confirms near-term business momentum, but it does not address the core concerns of elevated valuation and heavy leverage that underpin our Hold rating. The positive quarter slightly reduces downside risk but does not shift the thesis toward Buy; we need to see sustained improvement in balance sheet metrics and FCF consistency before becoming more constructive.