Morning Note: Market news and updates from Compass Group and Becton Dickinson.

Market News

US equities ticked higher last night – S&P 500 (+0.4%); Nasdaq (+0.2%). ARM ADRs fell post-market after the company gave a cautious revenue forecast. Qualcomm declined on concerns about slowing smartphone growth. Ford declined after the firm warned profit may fall by $2bn or more this year. 

The Fed’s Austan Goolsbee said persistent high tariffs might disrupt supply chains and drive up inflation. Philip Jefferson said the policy rate is still restrictive. Michelle Bowman said regulators have power to amend bank rules to improve Treasury-market liquidity. The 10-year Treasury yield slipped to 4.45%, while gold trades at $2,856 an ounce.

In Asia this morning, stocks also moved higher: Nikkei 225 (+0.6%); Hang Seng (+1.4%); Shanghai Composite (+1.3%). The yen rose after the BOJ’s Naoki Tamura flagged the need for two or more rate hikes by early next year.

The FTSE 100 is currently 0.9% higher at 8,705. The Bank of England is expected to cut rates by 25 basis points to 4.5% and downgrade its UK growth forecasts, while predicting higher inflation this year. 10-year Gilt yields slipped to 4.45%, well down from the recent peak of 4.9%, while Sterling trades at $1.2445 and €1.2010.

Brent Crude trades at $74.50 a barrel. Saudi Arabia hiked the price of its flagship crude to Asia by $2.40 a barrel – the most in more than two years — as the kingdom responds to surging premiums for Middle Eastern crude. The UK will make it easier to approve and build nuclear power plants. It’s all part of Keir Starmer’s plan to boost growth, bring down utility bills and decarbonise.

Source: Bloomberg

Company News

Compass Group has this morning released a brief but positive trading update ahead of its AGM which covers the first quarter of its financial year to 30 September 2025. Guidance for the full year has been reiterated and the outlook for the business remains positive. The shares have been a strong long-term performer and have experienced a little profit taking this morning.

Compass is the world’s largest foodservice company, operating in 30 countries, serving over 5.5bn meals a year. The group also operates a targeted support services operation, which accounts for 15% of revenue, and a third-party food purchasing business. The company reports in US dollars, but its shares are listed in the UK.

In the three months to 31 December 2024, the group continued to capitalise on dynamic market trends, using its proven competitive advantages to drive higher revenue and profit growth. Organic revenue – a combination of like-for-like volume growth, price, new business, and client retention – grew by 9.2%. This compares to the company’s full-year guidance for growth of ‘above 7.5%’. Organic growth drivers were in line with expectations, with net new business supported by strong client retention, and pricing and volumes trending as anticipated. 

All regions and sectors performed well, with positive outsourcing trends continuing to underpin growth momentum. The group’s largest region, North America (c. two thirds of revenue), grew by 9.7% in organic terms. In Europe, the group has continued to enjoy a step change in its performance – organic revenue was up 8.4% – which has benefited from growth initiatives as well as favourable outsourcing conditions. The Rest of World region grew by 7.9%.

Compass has continued to reshape its portfolio to focus on growth opportunities in attractive markets – the group has exited, or agreed to exit, a number of non-core markets, including Brazil and Mainland China. During the latest quarter, the company disposed of its operations in Chile and Kazakhstan. Given that the Rest of World region now accounts for only 5% of revenue on a pro forma basis, the internal management reporting structure has been changed to combine Rest of World with Europe to form a new International region. 

As expected, there is no update on profitability or the group’s financial position at this stage. The group’s flexible cost base has helped the margin to recover from pandemic lows despite re-opening expenses, the cost of mobilising new contracts wins, and inflationary pressures.

At the last balance sheet date (30 September 2024), financial leverage was 1.3x net debt to EBITDA, within the medium-term target of 1.0x-1.5x. The group is buying back its shares and has completed its $500m (£410m) programme.

The group is also paying an attractive dividend – a FY2024 payout of 59.8c was up 13.7% and equated to a yield of 1.8%. In total, $1.5bn was returned to shareholders. For now, the company hasn’t committed to a further buyback programme – we may get something with the H1 results in May.

As the group focuses on the significant structural growth opportunities in its core markets, it has stepped up its M&A activity to expand its portfolio of brands, focusing on digital innovation and delivered-in solutions. Expenditure on M&A for the financial year to date is c.$1.0bn, the majority relating to Dupont Restauration (France) and 4Service (Norway), which completed in January.

The group is currently prioritising strategic acquisitions to further enhance its unique sectorised approach to clients. Management has a strong track record of successful M&A in North America and is using that blueprint to unlock growth in other regions. Although larger deals may reduce the amount of excess cash flow available for share buybacks, we believe reinvesting in the core business is good capital allocation and will generate strong cash flow over time.

Overall, Compass continues to show it has the flexibility to weather the uncertain macro-economic environment whilst continuing to invest in the business to enhance its competitive advantage, support long-term growth prospects, and further consolidate its position as the industry leader in food services. Investment in digital expertise is bringing benefits of increased new business wins, higher customer participation and transaction spend, reduced food waste and food cost, and increased productivity and staff retention. Although there are threats – permanently increased levels of working from home and online learning, higher unemployment in a downturn, and increased competition from delivery providers – we believe the company is well placed to cope, with the more cyclical Business & Industry unit now a smaller percentage of revenue (a third vs. a half) and a higher level of volume protection in contracts.

The scope for growth from first-time outsourcing and share gains is significant, and the group currently has an excellent pipeline of new business. As the largest player (albeit with less than a 15% share) in the $320bn global market, Compass is well placed to consolidate its position as a trusted provider, able to offer clients and consumers safe and innovative solutions. Scale provides a vital advantage over smaller players, while corporates and other institutions will be more open to outsourcing as they seek improved health and safety protocols, resilient food supply chains, and financially strong suppliers. This is especially the case in the health and education sectors which previously used in-house catering providers.

Despite the strong performance, given the early stage in the year, the company has maintained its guidance for the financial year to September 2025 – high single-digit underlying operating profit growth on a constant-currency basis, including announced acquisitions, disposals and exits in FY2024 and to date in FY2025. This will be driven by organic revenue growth above 7.5% and ongoing margin progression.

Overall, the company remains ‘excited’ about the significant structural market opportunity globally. Management remains confident in sustaining mid-to-high single-digit organic revenue growth, ongoing margin progression and profit growth ahead of revenue growth.

Source: Bloomberg

Last night Becton Dickinson released results for the first quarter of its financial year to 30 September 2025, with revenue growth, margin expansion, and EPS all slightly ahead of management expectations. In response, the company nudged up its full-year guidance for EPS. The company also announced its intention to separate its Biosciences and Diagnostic Solutions business in a move designed to unlock value.

Becton Dickinson (BD) is a leading global supplier of medical devices and instrument systems. The group’s products help achieve better healthcare outcomes, mitigate healthcare cost pressures, and improve healthcare safety. 90% of revenue comes from products where the group is the market leader, with 85% from recurring or non-capital related purchases. As a result, the company is well placed to benefit from increased demand for healthcare from an ageing population and in emerging markets. In the near term, revenue growth will be, in part, dependent on improving patient admissions and surgical volumes and a stable capital investment environment.

The BD 2025 Strategy is targetting sustainable mid-single-digit revenue growth (i.e., 5.5%+), margin expansion of 540bps (to 25%), and double-digit earnings and free cash flow growth. The group is actively managing its portfolio – the diabetes care unit has been spun off and the surgical instrumentation platform sold. In addition, the group is exiting lower margin products and markets – the number of stock lines has been cut by 20%, achieving the 2025 target a year early, with a further reduction expected. The result is a more simplified portfolio and increased efficiency able to drive improved operating leverage. The focus is now on operational simplification via a 20% reduction in manufacturing plants.

Becton continues to shift toward faster growth markets via the launch of innovative new products and through acquisitions. The $4.2bn acquisition of the Critical Care unit of Edwards Lifesciences adds a high-growth, innovative industry leader in advanced patient monitoring with AI algorithms serving millions of patients globally. The company invented the hemodynamic monitoring category, and its solutions are currently used in more than 10,000 hospitals globally to better understand the cardiovascular condition in real-time for critically ill patients to help improve outcomes. It has grown by 7% p.a. over the last five years, with 80% of revenue recurring and a margin of 25%. Although the deal is larger than the guidance for M&A spend ($1.5bn-$2.0bn per year), it is in line with the group’s strategy and represents an attractive addition to its stable of innovative products.

During the three months to 31 December 2024, Becton’s revenue from continuing operations grew by 9.6% on a currency-neutral basis to $5.2bn. Organic growth (i.e., excluding acquisitions) was 3.9%, as expected below the guidance range for the year of 4.0%-4.5% as the business faced a number of anticipated market headwinds.

By region, growth in the US (+12% to $3,080m) outpaced the International business (+6.3% to $2,089m). By division in the quarter:

·        BD Medical (52% of sales) grew by 5.0% in organic terms, driven by Medication Delivery Solutions and Medication Management Solutions.

·        BD Life Sciences (25% of sales) was up 0.5%, held back by expected transitory market dynamics that resulted in lower demand for research solutions in China and the US.

·        BD Interventional (23% of sales) rose by 5.5%, driven by performance across the segment.

As expected, the macro environment in China remained a challenge, stemming from value-based pricing as government buyers look to control costs, a slowdown in biotech research spending, and a clampdown on corruption. Elsewhere, growth was also impacted by transitory market dynamics which resulted in lower market demand for research instruments and customer inventory de-stocking in anti-coagulants and vaccines.

The margin is expected to expand sequentially as we go through the year. In the latest quarter, the gross margin rose by 370 basis points at constant currency to 54.8%, while the adjusted operating margin increased by 340 basis points to 23.6%. Adjusted EPS grew by 28% on a currency-neutral basis to $3.43, versus the market forecast of $2.98.

Free cash flow performance fell by 20% to $588m in the quarter due to the timing of planned one-time cash payments. Following the Critical Care acquisition highlighted above, Becton’s financial leverage has risen to 2.9x net debt to EBITDA, in line with expectations. The aim is to de-lever back down to its long-term target of 2.5x within 12 to 18 months.

Although free cash flow will mainly be used for debt repayment, the group is also buying back its shares – management has said this is justified given the cash flow performance and the ‘strong intrinsic value’ in the shares. The company has already repurchased $750m of stock and the board has authorised a further 10m shares (currently c.$2.4bn) in addition to the shares that remain available under the board’s previous authorisation.

Cash flow will also be directed to internal growth opportunities, bolt-on M&A, and the dividend. The group currently spends just below 6% of revenue on R&D, with 60% directed towards what the company calls transformative solutions. More than 20 key new products were launched during the last financial year, on the way to the group’s target to launch 100 new products by FY2025. In particular, the company notes that the GLP1 market is a $1bn opportunity as its devices are used for the delivery of weight-loss drugs. The group also highlighted how AI is being used to make the most of the data generated by the companies three million smart devices. There will be more on this at the forthcoming Investor Day.

The company recently announced additional investment in its US manufacturing network to add capacity for critical medical devices to meet the ongoing needs of the nation's health care system. The new lines will boost BD’s capacity of domestically manufactured safety-engineered injection devices by more than 40% and conventional syringes by more than 50%.

A progressive dividend policy has been maintained for 53 consecutive years, with an indicated annual payout for FY2025 of $4.16, up 9.5%, and equal to a yield of 1.7%.

In a separate announcement the company has outlined a plan to separate its Biosciences and Diagnostic Solutions business from the rest of BD to enhance strategic focus and growth-oriented investments and capital allocation for both BD and the separated business and enhance value creation for shareholders. After the separation, the New BD is expected to have fiscal 2024 revenue of $17.8bn, with a $70bn+ addressable market growing at approximately 5%. It will have leading positions across four new operating segments: Medical Essentials, Connected Care, BioPharma Systems, and Interventional. The separated Biosciences and Diagnostic Solutions business is expected to have $3.4bn in fiscal 2024 revenue with a $22bn+ addressable market growing at mid- to high-single-digits. The board is exploring all separate options such as a Reverse Morris Trust (merger), sale, spin-off, or other transaction. More specifics will be announced by the end of FY2025, with completion expected in FY2026

The group has expressed confidence in its outlook for the financial year to September 2025.

-        Guidance for adjusted Diluted EPS has been increased to a range of $14.30 to $14.60, which reflects growth of 10% at the midpoint. This reflects an operational increase of $0.175 compared to its previously issued guidance, which is enabling it to absorb the estimated impact of incremental translational foreign currency of $0.15.

-        Organic revenue is still expected to grow by 4.0%-4.5% and be second-half weighted.

-        By segment, growth expectations relative to the group organic growth range are: Medical in-line, Life Sciences below, and Interventional above.

-        Adjusted revenue (including the impact of M&A) is expected to grow by 8.8% to 9.3% to $21.7bn-$21.9bn.

-        The operating margin is expected to grow by around 100 basis points, implying the ‘25% in 2025’ target remains in place.

Source: Bloomberg