Morgan Stanley praises excellent first half performance at Compass in US

Compass's first half performance in the US was "excellent", offsetting a "sharp deterioration" in its "Rest of the World" segment.

Together with positive foreign exchange effects on the bottom line and lower interest costs, that led analysts at Morgan Stanley to bump up estimates for the company's earnings per share by 2.2% for 2016, another 1.6% in 2017 and by about 1% from 2018 onwards.

The catering services giant's US arm delivered organic sales growth of 8.3% over the past six-month period, marking a sixth consecutive year of high single-digit growth and pushing the region's share of earnings before interest and taxes from 46% to 59% of the group total.

However, the sharp deterioration in Rest of the World saw the rate of growth in organic sales slow from 3.6% in the first quarter to -0.2% in the second quarter.

RoW was only forecasts to contribute 14% to the group's EBIT in 2016 "but it has been a major sales driver in the past,and the speed of the slowdown has been sharp."

Worsening conditions was the sole reason for the drop in margins observed in the first half and sales in the region were expected to still be "under pressure" in 2017, according to Morgan Stanley.

"With a fairly balanced risk-reward ratio, we rate Compass shares Equal-weight, though do still see it as attractive for investors looking for long-term compounders with a relatively defensive profile," the broker said.

Morgan Stanley also assumed a smaller share buyback in 2016.

The broker bumped up its target price from 1,190p to 1,250p and reiterated its 'hold' recommendation on the stock.