Compass Group: Plates Up Another Strong Quarter

Narrow-moat Compass CPG has put in a solid shift, with organic revenue growth for the three quarters of the year to date north of 21%. While growth slowed in the third quarter to 15%, this was expected, against tougher 2022 comparables. Having upgraded full-year guidance last quarter, there were no changes this time around, but with expectations of organic revenue growth of about 18%, combined with operating margin improvement to 6.7%-6.8%, this represents a solid improvement, albeit still someway off the prepandemic levels of profitability. With shares hovering right around our GBX 2,250 fair value estimate, however, we see limited value at this time.

Geographically, the rest of world segment was the standout performer, delivering 20% organic revenue growth in the third quarter. With this region recovering later than others from the pandemic, it’s likely this tailwind will last another few quarters yet. Client retention remains high across the board, at almost 97%, higher than prepandemic levels. Overall, it’s the combination of strong new business growth, pricing, and increasing volumes from existing clients that support today’s strong numbers.

Longer-term, as the number one catering company in the world, we believe Compass Group is well-positioned to continue to take market share, as many smaller operators folded over the course of the pandemic. How long these tailwinds persist is another question, but certainly for the remainder of 2023 and likely into next year too.