The recent pullback in Compass Group PLC (LSE:CPG) shares is unjustified, according to UBS, which argues that the market's concerns around the potential impact of AI on employment and demand for workplace catering are overcooked.
In a note to clients, the Swiss bank noted that some investors view the FTSE 100 group as an "AI loser", hit by second-order effects as job displacement in the wider economy leads to top-line pressure.
Analyst Ivar Billfalk-Kelly said he believes any such effect will be limited in the near term, with Compass continuing to deliver strong operational performance, with pricing power intact and a more robust earnings profile than pre-Covid levels.
Shares now trade on around 20x forward earnings, broadly in line with historic averages despite a forecast 13% compound annual growth rate (CAGR) in earnings per share between 2026 and 2029.
The analyst sees scope for upside to Compass’s 2026 financial guidance, particularly on pricing. US food-away-from-home inflation remains around 4%, above the 2-2.5% pricing increase implied by management guidance.
Pricing could therefore land closer to 3%, in line with peers such as Aramark.
Recent surveys and data on employment and hospital admissions also point to steady demand.
The derating in the shares also reopens the conversation around capital returns, the analyst believes.
While Compass is likely to remain near the top end of its leverage range in the near term, he sees potential capacity for up to $2 billion in buybacks by the 2027 financial year.
UBS rates the stock 'buy', with a 12-month price target of 2,985p, versus Tuesday's 2,181p close.