Despite the solid top-line results and management's announcement of a £500 million share buyback plan over the next 12 months, shares in Compass Group (CPG) declined this week. We chalk this up to both general market sentiment as well as particular concern about the firm's exposure to Europe, where Compass generates roughly 24% of sales and operating profits. We don't dismiss these latter concerns by any means, because this is significant exposure to a highly uncertain geography. At the same time, Compass is fairly diversified from an industry standpoint, with a spectrum of clients from governments and non-profits to corporate entities. Moreover, the firm is holding steady on the expense line. Between tight cost controls and strong customer retention levels, we think the firm's ability to generate consistent cash flows is relatively insulated, which is why we assign the firm a low uncertainty rating. We will be updating our model to reflect full fiscal 2011 results but we don't anticipate a change to our fair value estimate.
The above is an excerpt from the Morningstar Research Report on Compass. Click here to read the full report. Morningstar Research is available to Premium subscribers--more information here.
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