RBC Capital upgrades Compass after underperformance

Catering group Compass got a boost on Friday as RBC Capital Markets upgraded the stock to 'outperform' from 'sector perform' and lifted the price target to 1,750p from 1,530p following recent underperformance.

RBC noted that the stock has not only underperformed the FTSE 100 lately, down 10% since June, but also other defensive growth stocks in the sector. This has left the shares trading on a material valuation discount to peers, which RBC said was "harsh".

"In a sector with little value at present (and a number of risky recovery plays), we believe Compass is a sensible place to be on a relative basis," it said.

RBC pointed out that trading at Compass has been robust, with organic revenue growth accelerating to 5% in the third quarter. The bank said it expects to see similar growth in the fourth quarter, excluding any impact from hurricanes.

"We expect US growth to remain strong, given Compass's strong competitive advantages and a very promising pipeline. European growth has improved and with better GDP and employment data of late, there is scope for further acceleration going forward. Whilst the ROW remains weak, comparatives are benign going into 2018 and we would expect a return to organic growth."

RBC argued that with Compass, investors are getting a rare combination of above-average organic growth, improving margins and strong return on invested capital. In addition, the balance sheet remains strong and there is scope for £2.3bn of excess cash in the next three years.

At 0945 BST, the shares were up 1.6% to 1,626p.