Compass Group Earnings: Business Is Heating Up as We Progress Through 2023

Narrow-moat Compass Group CPG topped its impressive first-quarter results, with organic revenue growth of 25% for the first half of the year. Operating margins rose by 80 basis points to 6.6%, still a way off coronavirus prepandemic levels, but moving steadily in the right direction at least. Management have upgraded full-year guidance on the back of these strong numbers, so while we also expect to adjust our forecasts, we believe the shares are fairly valued relative to our GBX 2,060 fair value estimate.

With North America having reopened faster than other parts of the world after the pandemic lockdowns, it is the turn of Europe and rest of the world segments to outperform now as they play catch-up, with organic revenue growth in both these regions running close to 30%. However, North America’s head start has allowed it to track back much of that lost operating margin, which has now recovered to 7.8%, essentially at prepandemic levels already. As new business beds down in other regions, we expect operating margins there to rise naturally as efficiencies in new facilities are found, for example optimal staffing patterns and minimising food wastage.

In the longer term, as the number-one catering company in the world, we believe Compass Group is well positioned to continue taking market share as many smaller operators folded as a result of the pandemic. How long these tailwinds persist is another question, but certainly for the remainder of 2023 and likely into 2024 too.