This Big French Caterer Is Expanding Its Menu. Consider the Stock.
French catering giant Sodexo is once again facing headwinds after the reopening of offices, universities, and sports venues helped it bounce back from the coronavirus pandemic.
The stock (ticker: SW.France) rose 12.1% in the past year, but has slumped almost 5% in the past month to 87.96 euros ($93.44). The likely culprit is investor disappointment that 2023 guidance was only in line with forecasts amid the prospect of a recession and spiraling inflation.
Much of the impact of a downturn has already been priced into the stock. Sabrina Blanc, an analyst at Société Générale, wrote in a recent note that Sodexo has hiked its prices 5% to 6%, which will help mitigate the rising cost of ingredients.
The company’s businesses are varied—from operating the expensive Jules Verne restaurant in the Eiffel Tower to providing food at events like the Super Bowl. And Sodexo is expanding its services beyond catering. It is bundling services by combining office management, maintenance, and cleaning into contracts in order to become a one-stop business partner.
This sets it apart from rivals and makes it harder for clients to directly compare prices. Catering accounts for less than 60% of group revenue, according to Michael Field, an analyst at Morningstar , who says this has fallen from almost 80% in 2005. “There are also several other benefits from this approach, as integrated contracts, by virtue of their increased complexity, are generally longer in length than single-service contracts,” he wrote in a note.
He cites Sodexo’s 10-year contract with Rio Tinto, effectively running a remote mining station in Australia.
These integrated contracts also help the company retain repeat business, which Blanc says reached a high of 94.5% at the end of last year.
Andre Juillard, an analyst at Deutsche Bank, estimates that the stock could increase 19.3%, to €105. Morningstar’s Field has a €111 price target. “Sodexo estimates that the entire market for outsourced food services is only about 50% penetrated, which leaves ample room for the company to increase market share,” he says.
The business has a market value of €12.7 billion and employs 421,991 staff members. It fetches a multiple of 14.4 times this year’s expected earnings and is valued in line with its peers.
In October, it posted operating profits of €1 billion for the year ended in August 2022, an increase from €339 million in the same period the year before. Revenue in 2022 was €21.1 billion, up from €17.4 billion in 2021.
“We are now back up to our 2019 activity levels,” CEO and Chairwoman Sophie Bellon told Barron’s in an email. “Fiscal 2022 was a turning point with a return to positive net new business and record retention.”
She added the Sodexo has had a strong start to the year, and that “we are on the right track to deliver long-term profitable growth and reach our ambition to become the world leader in sustainable food and valued experiences.”
Further growth will come from Sodexo’s small but successful benefits-and-rewards division—customers buy food vouchers to encourage staff members to return to work, and also offer them as rewards for employees.
It saw organic growth of 23.4% over the first quarter. And despite constituting only 4% of group revenue, it contributes about 25% to the group’s operating profit.
“While local and regional players operate in this sector, there are just two firms with global capabilities in this extremely scalable business,” says Field. “It’s another differentiator and a strong source of growth for Sodexo.”