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Investing.com -- RBC Capital Markets in a note dated Monday has upgraded Compass Group Plc (LON:CPG) to “outperform” from “sector perform,” raising its price target to 2,775 pence from 2,700 pence.
The contract catering and food services giant, which trades at 2,372 pence per share with a market capitalization of £40,253 million, has underperformed the FTSE100 by approximately 30% year-to-date.
Analysts Karl Green and Andrew Brooke view the stock’s pullback as creating an attractive entry point for a high-quality compounder with less than 15% share of its total addressable market.
The forward 12-month price-to-earnings ratio has fallen back in line with the adjusted 10-year average of 21.5 times, putting the stock on a fiscal 2026 price-to-earnings-to-growth ratio of 2 times, which the analysts characterize as growth at a reasonable price territory.
The London-based company, which generates almost 80% of EBIT in North America, targets mid-to-high single-digit organic revenue growth.
This comprises 4% to 5% from net new contract wins, 2% to 3% from pricing, and net positive like-for-like volumes.
RBC estimates revenue of $46.07 billion for fiscal 2025, growing to $50.28 billion in fiscal 2026 and $53.95 billion in fiscal 2027.
Adjusted diluted earnings per share are projected at 131.90 cents for fiscal 2025, 145.70 cents for fiscal 2026, and 161.30 cents for fiscal 2027. The underlying EBITA margin is expected to expand from 7.24% in fiscal 2025 to 7.33% in fiscal 2026 and 7.46% in fiscal 2027.
The analysts address three concerns they believe have weighed on the stock. On consumer spending pressures, the report states that on-site participation rates are rising and Business & Industry is currently the company’s fastest growing vertical.
Regarding artificial intelligence disruption, Compass Group sees AI as a net positive in the short term, winning new accounts in the AI ecosystem. On GLP-1 weight loss medications, the analysts argue that forecasts for shrinking food and beverage sales fail to take pricing adjustments into account.
The company has less than 15% share of a total addressable market valued at approximately $360 billion, with first-time outsourcing underpinning approximately 45% of gross new business wins.
The 2,775 pence price target is based on a discounted cash flow model using medium-term revenue growth of 6%, terminal growth of 2.5%, a weighted average cost of capital of 7.5%, and a terminal margin of 7%.
Business & Industry represents 39% of fiscal 2025 sales, Healthcare & Seniors 23%, Education 18%, Sports & Leisure 14%, and Defence, Offshore & Remote 6%.