UK Edition
Questor: the shares are not meal-deal cheap but stay at the table for Compass’s predictability
Questor share tip: the catering giant has already made a 22pc gain for readers but they should wait for the next course
Much has happened in the two years since Questor extolled the virtues of catering giant Compass, notably the untimely death of chief executive Richard Cousins, which led to the early elevation of his lieutenant, Dominic Blakemore, in his place.
But much has stayed the same. The change of leadership has not slowed progress at the group, which serves more than 5.5bn meals a year in 45 countries. Diners could encounter their grub at numerous sports stadiums, office blocks, NHS premises and even the Academy Awards.
Investors have lapped up the predictable fare. Since our tip in November 2017 the shares have risen like an elegant soufflé, with a gain of 22.4pc.
There is no sense that the company is losing momentum despite its size. At the end of last month, company watchers at Goldman Sachs raised their forecasts for annual North American growth to 7.8pc from 7.3pc after a strong third quarter, boosted by a busy sports calendar.
That pushed up their growth expectations for the group to 6.1pc – beyond Compass’s own guidance range. It builds on growth of 5.5pc last year and 4pc before that.
About 60pc of income comes from North America and the beneficial dollar exchange rate should continue to nudge up earnings for the next few years.
The picture elsewhere in the world is not as rosy. In Europe, which contributes roughly a quarter of income, sales growth slowed markedly in the third quarter as Compass flagged, weakening volumes in the key markets of Britain, France and Germany reflecting creeping economic uncertainty. The company indicated in May that margins were no longer growing.
Compass has benefited from organisations outsourcing their catering to a specialist provider, but the vast majority of food service remains in-house or run by regional players. It has a good track record of winning and retaining contracts.
A strong balance sheet means it also has ample headroom for acquisitions, as seen by the £420m buy in June of Fazer Food Services, which consolidates Compass’s presence in the Nordic countries. Of course, some of its income depends on the broader economy. If staff start to feel a recessionary chill, they may start to bring in sandwiches for lunch.
The catering industry has so far remained removed from the technology-led disruption faced by other industries but its time may come. Already in some quarters people no longer go for food: thanks to apps, food comes to them.
- Read Questor’s rules of investment before you follow our tips
What happens if the likes of online takeaway service Just Eat turn their attention from late-night pizza and curry to the lunchtime office market?
In fact, they already have. In July last year Takeaway.com bought Israeli ordering company 10bis, which has concentrated on business-to-business trade. More recently, Just Eat, which is itself merging with Takeaway.com, acquired a similar start-up, City Pantry. This incursion was the subject of recent research by analysts at Barclays.
Many office blocks are no more set up to receive multiple food orders than they are to stash employees’ online shopping orders. And the sense is that these start-ups are focused, for now, on smaller firms that do not have their own canteen. Cost is also an issue, given that many workplace restaurants are subsidised to keep staff tethered to the premises.
But over time the threat is real, according to Barclays, which sees risks to 34pc of catering sector revenues. Lower canteen volumes would mean lower margins and could even slow the pace of outsourcing. However, Compass is painted as one of the winners because it has greater scope to invest in its offering and perhaps even form partnerships with delivery firms.
Mr Blakemore believes the shift to healthy eating is currently a bigger challenge than the nascent digital revolution.
In the meantime, the shares are fine-dining expensive rather than cut-price lunchtime meal deal. They trade at 23.3 times earnings for the year just ending and 21.4 times for the 12 months to September 2020. Long-term fans know this is nothing new. So for now, keep holding Compass.
Questor says: hold
Ticker: CPG
Share price at close: £20.04
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.
