International. The group derives most of its revenue from catering, like its British rival Compass. However, Sodexo prefers not to consider itself a restaurant business but a provider of other services, more similar to the Danish ISS. He says the expansion will diversify revenues. But this can only damage your valuation.
Sodexo announced third-quarter results below analysts' expectations. He also suggested that he could achieve, and only achieve, the profit margin targets for the year. It is not something remarkable, considering that most of the year has already passed (it ends in September). It is understandable that the revisions to his last menu were contradictory. A disappointing market punished Sodexo, sending the stock down 5%.
It is true that there were extenuating circumstances. Sodexo has gone through a restructuring, which entails inevitable extraordinary charges.
If Compass is for reference, it is worth asking why diversifying from catering is a good idea. The company earns a third less from its capital than its British rival, according to data from S&P Capital IQ. And ISS offers an even lower ROE than Sodexo. The multiple of 14 times the forecasts for the price-to-earnings ratio, well below the 20 times of Sodexo and Compass, sends the wrong message to the market about how it should value the ambitions of the French group.
The company will need more ambitious growth targets, and better execution, to avoid an even worse fate: valuation deflating towards ISS levels. Meanwhile, the wardens of the market punish Sodexo for trying to flee from his roots.
