On Thursday, Citi reiterated its Buy rating on Compass Group PLC stock (LON:CPG:LN) (OTC: CMPGY), maintaining its price target at £26.00. The firm anticipates a potential upside in the company's upcoming half-year 2024 results, expected to be released on May 15, 2024.
Citi's analysis suggests that Compass Group's earnings before interest and taxes (EBIT) margin could be 25 basis points higher and revenues could be 2.5% above the Visible Alpha consensus. This could translate to a 6% EBIT outperformance, which is significant for investor sentiment.
The forecasted margin improvement is particularly noteworthy as, despite Compass Group's history of strong organic growth, the consensus has not predicted an adjustment in EBIT margins back to the 2019 level of 7.4% until 2026. Citi identifies the first half of 2024 as a potential "sweet spot" for Compass Group's margins, citing several factors that could contribute to this positive deviation.
The firm outlines three key drivers for the expected margin enhancement: the catch-up of costs and prices, which holds the highest potential for upside; sustained like-for-like volume growth from the first quarter, bolstered by ongoing return-to-office trends and job creation in vital sectors; and the impact of new contract openings slated for the second half of the year, which are likely to dilute margins.
Citi also anticipates that Compass Group management may revise their guidance upwards with the forthcoming results. Additionally, any updates on mergers and acquisitions or disposals could be positively received by the market. The firm's positive outlook on Compass Group is set against the backdrop of these anticipated developments.
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