Compass Group PLC (LSE:CPG) has long been seen as a reliable operator, benefiting from steady contract wins and its scale in procurement.
But according to UBS, there is more going on under the bonnet, and it could help push profit margins higher than many expect.
UBS believes Compass can deliver an 8% operating margin by 2029, ahead of the current market consensus.
The main driver is improved buying power, particularly through Compass’s group purchasing organisations, which help secure lower prices from suppliers. Another factor is the fast-growing vending and convenience segment.
This part of the business brings in around $3 billion of revenue in North America, roughly 10% of regional sales.
It is growing at about 10% a year and delivers operating margins between 12% and 15%, compared with 6% to 8% for traditional food services.
UBS suggests that as vending and convenience become a bigger part of the mix, this could add 10 basis points to group margins, even before considering any procurement benefits. It also sees room for improvement in Europe, where Compass’s use of purchasing groups is less developed.
The bank has a price target of 3,010p on the shares, which is currently changing hands for 2,667p, implying 12% upside.
The shares trade on around 19x forecast enterprise value to operating profit and 26x adjusted earnings. While not cheap, the potential for margin gains, particularly from vending, supports UBS’s 'buy' recommendation.