DoD tests AI models that make it easy to switch from vendors like Palantir
Investing.com -- Morgan Stanley (NYSE:MS) has downgraded Sodexo (EPA:EXHO) to "equal-weight" from "overweight" and cut its price target to €68 from €89, in a note dated Friday, citing weaker-than-expected growth, contract losses, and a lack of transparency on key risks.
Deutsche Bank (ETR:DBKGn) has also revised its stance, downgrading Sodexo to "hold" from "buy" and lowering its target price to €73 from €93 following the company’s early profit warning.
Sodexo released its H1’25 results two weeks ahead of schedule, though its full report remains set for 4 April. The company reported like-for-like revenue growth of 3.5% (€12,475 million), falling short of consensus expectations of 4.5% growth and €12,576 million in revenue.
Underlying EBIT came in at €651 million, reflecting a 6.4% increase, with a margin of 5.2% (consensus: €670 million and 5.3%).
However, Sodexo issued a warning on its full-year guidance, cutting its expected revenue growth to 3-4% from the previously projected 5.5-6.5%, while also revising EBIT margin growth expectations downward to 10-20 basis points from 30-40bps.
Deutsche Bank pointed out that Sodexo’s early disclosure highlighted weaker-than-expected top-line growth, with revenue and margins below consensus estimates. The company’s revised guidance was a key factor in Deutsche Bank’s decision to lower its rating and price target.
The downgrade reflects broader concerns about Sodexo’s ability to deliver growth, particularly in North America, where healthcare contract delays and declining university enrollments have weighed on results.
In Europe, facilities management remains under pressure, especially among French and real estate clients. Meanwhile, a major global integrated facilities management (IFM) contract loss adds further uncertainty, with analysts questioning why multiple setbacks are emerging simultaneously.
As Morgan Stanley observed, "It is not clear why these are all happening at the same time, why they weren’t mentioned in previous updates, and whether there are further risks from contract timings and contract losses."
Compared to its peers, Sodexo continues to lag. Compass Group (LON:CPG) and Aramark have reported more resilient growth, with Compass still forecasting organic sales growth above 7.5%.
"Sodexo has a weak track record of meeting guidance, and Compass has historically seen ~4 percentage points of organic sales growth outperformance," Morgan Stanley noted.
Both banks have adjusted their valuation models in light of these developments. Morgan Stanley now applies a 20% discount relative to peers, valuing Sodexo at 12x price-to-earnings and 7x enterprise value-to-EBITDA for FY26, with a target of €68.
Deutsche Bank has similarly revised its price target downward to €73, aligning with the lower growth outlook.
Sodexo’s credibility in meeting guidance remains a key issue, given repeated profit warnings over the past three years.
Analysts are pressing management for greater clarity on how it plans to mitigate the impact of declining university enrollments and improve contract retention rates, which are expected to remain below the 95% target.
With ongoing structural challenges and limited margin expansion opportunities, Morgan Stanley warns, "Whilst the shares look inexpensive relative to peers and their own history, Sodexo is still very exposed to the low-growth / margin FM segment, where the strategy is not clear and it could continue to lose contracts.