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Morningstar | Compass Plates Up a Solid 1Q

Catering giant Compass Group made an encouraging start to the year, with its first-quarter trading update showing organic revenue growth of almost 7%. While ahead of our expectations for the full year, we await to see how the next quarter or two pan out before making any material changes to our forecasts. We maintain our GBX 1,670 fair value estimate for the stock and our narrow-moat rating for the company. We believe the shares are currently fairly valued.

Geographically the outperformance came from the North American and European divisions. North America, which has long been the growth engine of the group, saw organic revenue growth of 8%, in line with the pattern of growth we witnessed in 2018. In the context of waning European macroeconomic conditions, the 6.4% organic growth rate delivered by Compass’ European business came as a shock, although some of this was helped by elements such as U.K. defense contract wins. The rest-of-world business, heavily weighted toward oil- and gas-related contracts, saw a slight uptick in growth to 2.8% over the period, as conditions slowly improve in the sector.

As the industry leader, both in terms of size and profitability, we believe that, longer term, Compass group is well-positioned to benefit from several structural trends, including consolidation of the food service industry, and the continued shift toward outsourcing of catering services.