Last Update03 Oct 25Fair value Increased 1.08%
The analyst price target for Compass Group has increased modestly, rising by £0.30 to £27.72 per share. Analysts cite strengthened revenue growth and improved valuation multiples as supporting factors for their revised outlook.
Analyst Commentary
Recent analyst actions have seen several price target increases for Compass Group, reflecting a mix of supportive and cautious perspectives on the company’s outlook. An evaluation of their commentary reveals both bullish momentum and lingering reservations.
Bullish Takeaways- Bullish analysts highlight the company's capacity to generate steady revenue growth, which underpins their willingness to raise price targets.
- There is continued confidence that Compass Group is executing well on its strategic initiatives, which justifies higher valuation multiples.
- Improvements in core business performance are seen as a signal for sustained momentum in key operating regions.
- Some analysts view current market conditions as favorable for future earnings growth, which strengthens the investment thesis.
- Bearish analysts maintain a cautious stance and keep their ratings neutral or on hold despite the raised targets.
- Concerns remain around potential operational headwinds, such as cost inflation and competitive pressures, which could impact margin expansions.
- Some believe that the recent upward moves in valuation leave limited room for upside unless execution continues to outperform expectations.
- Sector-wide uncertainties are prompting a more measured approach, with a focus on monitoring future earnings consistency.
What's in the News
- Compass Group PLC has upgraded earnings guidance for fiscal year 2025, now expecting constant currency underlying operating profit growth to approach 11%. This outlook is supported by organic revenue growth above 8% and ongoing margin improvement (company guidance).
Valuation Changes
- Fair Value: Has risen slightly, increasing from £27.42 to £27.72 per share.
- Discount Rate: Has declined modestly from 8.92% to 8.87%.
- Revenue Growth: Has edged up, moving from 7.34% to 7.38%.
- Net Profit Margin: Is largely unchanged, showing a slight decrease from 5.19% to 5.18%.
- Future P/E: Has increased significantly, rising from 21.37x to 28.99x.
Key Takeaways
- Strategic focus on core markets and digital initiatives is expected to enhance organic revenue growth and improve future net margins.
- Acquisitions and expansion in underpenetrated regions provide long-term growth opportunities, supporting earnings and shareholder returns.
- Operational and financial challenges, including higher interest expenses and costs from sustainability initiatives, may pressure net margins and impact earnings.
Catalysts
About Compass Group- Provides food and support services in North America, Europe, Asia Pacific, and internationally.
- The strategic exit from noncore markets and continued investment in core markets through capabilities, CapEx, and M&A position Compass Group to drive higher net new business growth, likely enhancing future organic revenue growth.
- Increasing investment in digital initiatives and productivity, alongside achieving pre-pandemic unit margins, is expected to improve future net margins as scale grows and overhead leverage increases.
- Recent acquisitions, such as Dupont Restauration and 4Service, are expected to be accretive to profit from fiscal year '26 and beyond, boosting earnings growth through operational scale and synergies.
- The significant structural growth opportunity within the $320 billion addressable foodservices market, particularly in underpenetrated regions like Europe, offers long-term revenue growth potential as Compass expands its market share.
- A strong cash position supports ongoing shareholder returns, with flexibility for reinvestment into growth initiatives, possibly boosting future EPS through buybacks and dividend increases consistent with policy.
Compass Group Future Earnings and Revenue Growth
Assumptions
How have these above catalysts been quantified?- Analysts are assuming Compass Group's revenue will grow by 7.3% annually over the next 3 years.
- Analysts assume that profit margins will increase from 3.3% today to 5.2% in 3 years time.
- Analysts expect earnings to reach $2.8 billion (and earnings per share of $1.67) by about September 2028, up from $1.5 billion today.
- In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 29.2x on those 2028 earnings, down from 39.4x today. This future PE is greater than the current PE for the GB Hospitality industry at 16.9x.
- Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
- To value all of this in today's terms, we will use a discount rate of 8.99%, as per the Simply Wall St company report.
Compass Group Future Earnings Per Share Growth
Risks
What could happen that would invalidate this narrative?- The company has seen an increase in interest expenses due to higher interest rates and debt, which could impact net margins and earnings in the near term.
- The disposal of noncore markets and recent acquisitions is expected to reduce profit by $30 million in fiscal year 2025, potentially impacting net earnings.
- The company's effective tax rate is relatively high at 25.5%, which could constrain net margins compared to companies with lower tax rates.
- Pricing trends are dependent on inflation rates, and while pricing is currently at 2% to 3%, any increase in inflation might squeeze profit margins if not passed on effectively.
- The company faces operational complexities due to allergens, dietary requirements, and sustainability initiatives, which could increase business costs and pressure net margins.
Valuation
How have all the factors above been brought together to estimate a fair value?- The analysts have a consensus price target of £27.737 for Compass Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £30.76, and the most bearish reporting a price target of just £22.37.
- In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $54.1 billion, earnings will come to $2.8 billion, and it would be trading on a PE ratio of 29.2x, assuming you use a discount rate of 9.0%.
- Given the current share price of £25.25, the analyst price target of £27.74 is 9.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
- We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.
How well do narratives help inform your perspective?
Disclaimer
AnalystConsensusTarget is a tool utilizing a Large Language Model (LLM) that ingests data on consensus price targets, forecasted revenue and earnings figures, as well as the transcripts of earnings calls to produce qualitative analysis. The narratives produced by AnalystConsensusTarget are general in nature and are based solely on analyst data and publicly-available material published by the respective companies. These scenarios are not indicative of the company's future performance and are exploratory in nature. Simply Wall St has no position in the company(s) mentioned. Simply Wall St may provide the securities issuer or related entities with website advertising services for a fee, on an arm's length basis. These relationships have no impact on the way we conduct our business, the content we host, or how our content is served to users. The price targets and estimates used are consensus data, and do not constitute a recommendation to buy or sell any stock, and they do not take account of your objectives, or your financial situation. Note that AnalystConsensusTarget's analysis may not factor in the latest price-sensitive company announcements or qualitative material.