Compass shares drop but Shore Capital still sees upside

(Sharecast News) - The share price of Compass took a hit on Monday after the catering group underwhelmed the market with its annual results, but it wasn't enough to deter Shore Capital which reiterated a 'buy' rating on the stock. Shore analyst Greg Johnson said the results - which showed a 30% increase in underlying operating profits to £2.1bn with organic growth of 19% and a 60 basis-point operating margin improvement to 6.8% - were in line with expectations and the company's prior guidance.

Meanwhile, Compass's outlook statement pointed to a further 13% in operating profit in the current fiscal year ending September 2024, which should result in a 2% upgrade to current earnings per share estimates, along with an addition $500m share buyback.

"We see the results as further evidence of the long-term cash compounding qualities of the Group, which should deliver low teens EPS growth over the medium term," Johnson said.

Johnson also highlighted that the stock trades at under 21 times current-year earnings, which is within its historic trading range. "We believe [the valuation] is more than merited given the higher growth profile, especially were inflation to moderate (supporting margin development) and bond yields to fall."

Despite the positive comments, the shares were down 4.3% at 2,003p by 1107 GMT.