Business Background and Investment rationale
Compass Group PLC is a contract food service company providing a range of consumer-facing food service solutions to clients in 70 countries. It operates in North America, Continental Europe, the United Kingdom and the Rest of the World.
Adequately handling food inflation
Through the MAP (Management & Performance) framework, Compass expects to improve it’s gross margin by 60 basis points and organic revenue growth by over 5% for the full year ending November 2008. This is achieved by menu planning (with a focus on reducing waste), product and supplier rationalization, and by instigating both client and consumer price increases to address food inflation.
Strong revenue growth and expansion in margins
In a trading statement today Compass anticipates strong organic revenue growth in North America (around 7% for the full year) and margins to improve by around 50 basis points. In Continental Europe the full year organic revenue growth will be around 5% and a margin growth of around 60 basis points is expected, with most of the main countries contributing strongly. In the Rest of the World, Compass expects around a 9% organic revenue growth for the full year and another strong improvement in the margin of over 120 basis points. The weakening of sterling against many of the currencies to which group is exposed will also improve margins. The group commenced a further £400 million share buy-back programme on 1 July 2008 that will support the share price.
Technical outlook
On daily chart, Compass is trading on positive slope and hovering around a strong support level of 324.0p. MACD is negative and 12 day EMA has crossed a 26 day EMA indicating a weak buy signal. 14 day RSI is below 50.0 showing a flat trend. 14 day DMI is near 20 showing no trend and consolidation. Stochastic oscillator is oversold and fast stochastic has crossed above slow stochastic indicating a weak buy. Stock has strong support near 324.0p and resistance near the 350.0p level, if it rises above resistance can be found near 380.0p.
Trading strategy
The stock can be bought at around 320.0p with a profit target of 356.89p and a stop loss of 303.95p (Hedge position: Short position in spread betting with £3.905 bet per point)
Business Background and Investment rationale
First Group PLC provides passenger transportation services. It operates in four divisions; UK Bus Services, UK Rail Services, North America Yellow School Buses and Greyhound Intercity Coach Transportation (United States and Canada).
Balance portfolio of business
The group’s balanced portfolio of businesses continues to generate strong operating cash flow and has good opportunities for future growth. Approximately 50% of revenue is secured under medium-term contracts. First Group’s contracts with government agencies and other large organizations in both the UK and North America represent a robust annual revenue stream worth £2.8 billion. After completion of a $3.5 billion acquisition of Laidlaw International Inc First Group America have created a stronger, more robust business. Operating in a vast, highly fragmented marketplace with clear growth opportunities First Group expects to deliver better than anticipated synergies of $150 million per annum from April 2009 on the Laidlaw acquisition.
Strong passenger growth
First Group is Britain's largest bus operator, running one in five of all local bus services. It’s fleet of nearly 9,000 buses carries approximately 3 million passengers a day across 40 major towns and cities. The introduction of passenger growth initiatives, more journeys with concessions and an increase in passengers (as soaring fuel prices entice commuters from their cars) have delivered a margin enhancement of 140 bps to 11.0. The group also operates one quarter of the UK passenger rail network including intercity, commuter and regional services carrying almost 275m passengers per annum.
Technical outlook
On daily chart, First Group is consolidating between 500.0p and 611.0p and has rebounded the last four times from a low of 500.0p. MACD is negative and the 14 day RSI is near 30, indicating that it is close to being oversold. DMI index is above 30 indicating strong negative trend, but trend is positive for MACD and 14 day RSI making a positive slope, a consolidation with correction is expected between 500.0p and 520.0p before a higher move is expected. Stock has good support at 500.0p and resistance at 569.65p and 613.35p.
Trading strategy
The stock can be bought at around 495.0p with a profit target 552.07p and stop loss of 470.18p (Hedge position: short position in spread betting with £2.525 bet per point)
