Thursday 18 April 2013

Compass Group (CPG) ... a free hit?

Sodexo (SW FP, mkt cap €10.4bn) is currently off 7% this morning on the back of softer than expected H1 earnings and expectations (according to Bloomberg) that consensus earnings will be cut by c. 5%. North America seems to be ok, but as was always likely, Europe is soggy. By contrast, Compass Group (CPG LN, mkt cap £14.8bn) is just over 1% lower, at 815p/shr. As a percentage of sales, CPG (c. 44%) is more exposed to North America than SW (c. 39%), but at just c. 5% more the difference is relatively marginal. Both have c. 35% exposure to Europe. One would imagine that a tough European market would also be impacting CPG, and that analysts may sharpen their pencils. A short on CPG looks like a free hit. So I've bopped it at 815p.

In summary:

  • SW disappointing H1, likely c. 5% cuts to earnings.
  • CPG and SW both c. 35% exposed to Europe.
  • CPG trading on 15.8x forward earnings (Bloomberg) close to six-yr high.
  • SW trading on 16.6x forward earnings (Bloomberg).
  • Strong correlation between share price performance of CPG and SW; as one would expect of World No.1 and 2 in outsourced catering.

Sodexo vs. Compass share price
Source: Bloomberg
Compass valuation, forward P/E and EV/EBITDA close to 6-yr highs
Source: Bloomberg

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