Compass Group: We Retain Our Narrow Moat Rating; Shares Look Undervalued

We have raised our fair value estimate for Compass Group by 13% to GBX 2,550 per share following a transfer of coverage. Higher top-line growth assumptions are the largest driver of our revised valuation, more than offsetting higher spending. We are raising our Morningstar Capital Allocation Rating to Exemplary due to its strong organic investment decisions, supplemented by a history of strong bolt-on acquisitions. We retain our Morningstar Uncertainty Rating of Medium. We assign Compass a narrow moat rating due to high switching costs and cost advantages from scale. The firm’s switching costs are supported by long-term contracts and client time and monetary costs from mobilization, evidenced by its high retention rates. Its cost advantages are derived from scale, which it uses to deliver industry-leading margins and take market share.