Compass Group is cooling off

The firm’s minor markets may be cooling off, but its core counties are still strong. 

London Stock Exchange
Source: Bloomberg

The company will reveal its full-year numbers on 24 November, and dealers are anticipating revenue of £17.84 billion and an adjusted net income of £881 million. These forecasts represent a 4.6% rise in revenue and a 1.9% increase in adjusted net income. Compass Group will also announce its second-half figures on the same date, and traders are expecting revenue of £8.87 billion and adjusted net income of £423 million, which compares with the first-half revenue and adjusted net income of £8.94 billion and £474 million respectively.

The largest catering company in the world is performing well in its core markets, but the business is starting to wane in other countries, which account for a smaller proportion of the group’s profits. North American revenue makes up just over half of the firm’s sales stream and business in the region is still growing. Its operation in Europe is returning to growth and confidence in the continent is creeping higher.

The recession Japan has slipped into could cause a problem for Compass Group, as the nation is a relatively large source of income for the firm. Emerging markets make up 18% of the group’s overall revenue, and the slowdown in Brazil and Turkey has got traders worried.

The collapse in commodity prices is hurting the catering company, as cutbacks at remote and offshore natural resource sites have required fewer of Compass’ services. Organic revenue for the first nine months rose by 5.5%, but adverse currency movements and restructuring costs in relation to contracts from commodity companies will dent the full-year profits.

Equity analysts are bullish on Compass Group, and out of the 28 ratings, ten are buys, 13 are holds, and five are sells. The average target price is £10.78, which is 2.2% above the current price.

The long-term outlook shows that 2015 has represented the biggest challenge to Compass Group since 2009, with the share price falling over 21% in the April-August period. However, we have seen substantial price recovery since the August low, importantly finding a new higher base to push higher this week. The establishment of that higher low provides greater confidence that the uptrend seen throughout the 2008-2014 period is likely to continue, despite the overbought weekly stochastic oscillator.

Compass Group weekly chart

In the shorter-term, it is clear the break above £10.64 was a notable one, representing the first major hurdle to this latest bounce. The close above this resistance has now provided a bullish view once more, with a move back above £11.20 likely in the near future. Given the creation of this new high on the weekly chart, we would need to see price close back below £9.63 to gain a bearish outlook once more. Thus, any downside prior to that is likely to be a short-term retracement unless it passes through £10.13 which would bring a more neutral outlook. In the short-term, any move lower would be looking towards the £10.64 level.

Compass Group 4-hour chart

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