Sodexo’s first-half results reflected ongoing pressure in European markets, which contributed to a slowdown in revenue and weaker-than-expected profitability. Revenue growth of 4.3%, to approximately EUR 9.46 billion, seemed fairly strong at first glance, particularly given tough economic conditions in one of Sodexo’s largest regions.
However, this masked a sequentially weaker second quarter, with even the stronger North American segment posting a tepid increase of only 1%, due mainly to the effects of a large healthcare contract loss in 2012. The European segment managed to keep quarterly revenue flat, as new facility management contract wins offset customer price sensitivity in the region. U.K. and the Rest of World segment also managed to increase revenue by only low-single digit percentages in the quarter.
Operating margins also fell by nearly 100 basis points, to 5.1% in the first half, as economic weakness in Europe largely offset profitability gains in the North American region. However, this figure also included EUR 50 million of exceptional charges meant to improve operational efficiency in the wake of European economic weakness. Even the fast-growing and highly scalable benefits and rewards business segment failed to impress, delivering a 30-basis-point margin decline, as pressure in the European business offset healthy expansion in Latin America.
Regardless, our long-term thesis remains intact for Sodexo, and we’re leaving our fair value estimate unchanged. Sodexo’s scale, geographic diversity, strong customer relationships, and ability to adjust costs in response to economic conditions all support our narrow-moat rating. Even though North American revenue growth was disappointing in the second quarter, our belief that secular outsourcing trends will lead to longer-term opportunity was supported by Sodexo’s significant amount of new contract wins and segment margin expansion. Analysts continue to believe that this segment will help offset European weakness in the coming quarters.
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