EUR 850.00 For Business Accounts Only

Morningstar | Narrow-Moat Compass Points the Way in 1H

Catering giant Compass Group romped through the first half of 2019 with organic revenue growth of 6.6%, while operating margins were held steady at all-time-highs of 7.5%. ­­While the revenue number at least was ahead of our expectations for the full year, management’s updated guidance is in line with our forecasts, indicating a slight moderation in the second half. We maintain our narrow moat rating for the company and our GBX 1670 fair value estimate for the stock. We believe the shares are currently fairly valued.

Geographically, North America, which generates more than 60% of group revenue, continued its strong run. Organic revenue growth here was almost 8%, while group leading operating margins were held steady at 8.6%. One of the key factors in Compass’ success in this region has been their focus on specific sectors, such as healthcare & seniors, where the company reported several important new contract wins, as well as sports & leisure which saw double-digit organic revenue growth over the period. The only area of some concern was Europe, where the business reported volume weakness in the U.K. and continental Europe. Although Compass was able to offset this to some degree with price increases, the addition of inflationary pressures to the mix would suggest that Europe does not currently represent an easy operating environment.

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.