Compass shares all over the place

With enough to like in these results, our head of markets explains why the share price has tumbled. 

Catering giant Compass (LSE:CPG) is something of an unsung hero among its FTSE 100 peers, and another strong and dependable set of results has consolidated that position.

The company is not immune from current global economic tensions, but the diversity of its business, both geographically and by business sectors, cushions some of that blow. 

In particular, a US business, which now accounts for over 60% of revenues, has ridden the wave of generally strong momentum in the world’s largest economy. This was underpinned by strong retention rates as well as new business wins, and, in terms of outlook, the pipeline is also looking secure. 

In addition, revenue growth from both Europe and the Rest of the World made a worthwhile contribution, resulting in underlying revenue growth of 6.4%, which outstripped the company’s previous guidance for a range of 4% to 6%. 

Source: TradingView Past performance is not a guide to future performance

Compass has also maintained its strong record of dividend growth. This is both a reflection of the strength of the balance sheet, as well as a clear sign of management faith in the company’s prospects, even if the projected yield of around 2% is not particularly punchy. 

It also remains active in the acquisition and disposals space which, while carrying a degree of execution risk, has served it well historically in honing its overall proposition. This aside, ongoing capital requirements tend to be low for the business since Compass tends to use the facilities and equipment of the companies which it services. 

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Meanwhile, despite the differing needs of those clients, Compass is able to offer a bespoke solution which underlines its strength and competitive edge.

The headline figures are therefore unsurprisingly stable, although a couple of slight misses coming in the form of a dip in pre-tax profit and a slight lessening in underlying earnings per share are rare blots on the copybook. 

So, a sharp focus on costs is welcome, particularly given the economic and political uncertainty currently being seen in most of its markets. Meanwhile, from an operational perspective the company inevitably faces risks from a food hygiene or safety failure, although mitigation plans are in place if necessary.

The share price reaction to the numbers is likely to be due to an element of profit-taking, as well as a tinge of disappointment at the headline level with the numbers themselves and a marginally cautious tone on prospects in Europe. 

Even so, over the last year the shares have risen by a thumping 34%, which compares to a hike of 5% for the wider FTSE 100 index and, although the company is clearly well-regarded, it seems that the shares are for the moment up with events. 

The general market view of Compass as a ‘hold’ is therefore likely to remain in place for the time being.