ii view: caterer Compass increases sales and profit prediction

Third-quarter trading update to 30 June

• Adjusted or organic revenue up 10.3%
• $300 million of a $500 million share buyback programme completed

Guidance:

• Now expects full-year organic revenue growth of more than 10%, up from towards 10% previously
• Now expects full-year adjusted profit growth of more than 15%, up from towards 15% previously

ii round-up:

Compass Group (LSE:CPG) today detailed sales ahead of City forecasts enabling the global caterer to upgrade its annual sales and profit forecasts.

Third-quarter sales to the end of June rose 10.3% year-over-year, surpassing analyst forecasts of 9.5% and driven by growth across all geographic regions. The Chertsey, Surrey headquartered company now expects adjusted full-year sales and profits of over 10% and 15% respectively, up from previous estimates of growth "towards" those amounts. 

Shares in the FTSE 100 company rose 4% in UK trading having come into this latest news up by close to 4% over the last year. Shares for rival caterer Sodexo (EURONEXT:SW) are up 14% over that time. The FTSE 100 index has improved by 6%. 

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Compass serves around 5.5 billion meals per year to staff in around 55,000 customer locations, although it was forced to close many of its operations during the pandemic. 

European sales stripped of acquisitions led third-quarter growth, climbing 12% and compared with growth of 11.8% in Q2. 

Adjusted, or organic sales for its core North American region gained 9.9% compared to 10.5% in Q2. Rest of the World sales rose 8.5%, down from growth of 9.4% in Q2. 

Compass flagged an acceleration in net new business growth during the quarter, while year-to-date net acquisitions now total $836 million, up from $392 million during its last full financial year.

Broker Morgan Stanley reiterated its ‘overweight’ stance on the shares post the update. Compass is scheduled to provide an investor presentation on 12 September with full-year results due 26 November. 

ii view:

Separated out of the former media company Granada in 2001, Compass Group today operates across the five areas of Business and Industry, Education, Healthcare and Senior Living, Sports and Leisure, and Defence, Offshore and Remote. Geographically, North America accounts for its biggest slice of sales at just over two-thirds, followed by Europe at just over a fifth and the Rest of the World the balance of around a tenth. Employing around 550,000 staff worldwide, clients have included the likes of Shell (LSE:SHEL), Microsoft Corp (NASDAQ:MSFT), Nike Inc Class B (NYSE:NKE), and HSBC Holdings (LSE:HSBA). 

For investors, comparatives have become tougher given its emergence from the global pandemic. Costs such as staff wages and food have risen, currency moves can hinder, while the tough economic backdrop cannot be ignored. 

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To the upside, organic sales growth across all geographic regions is ongoing and bolt-on acquisitions continue. Compass previously highlighted global structural growth opportunities, with just under half the worldwide food services market still self-operated, while shareholder returns remain a focus with ongoing share buybacks and a forecast dividend yield of around 2%.

For now, and given Compass’s alignment to the provision of food in uncertain economic times, this global outsourcer looks to remain worthy of its place in many long-term focused investor portfolios.  

Positives: 

• Diversity of both customer and geographical location
• Structural growth opportunity 

Negatives:

• Food costs can be volatile
• Currency movements can impact

The average rating of stock market analysts:

Buy