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Compass Group: A Long Way To Go

Mar. 07, 2021 11:58 AM ETCompass Group PLC (CMPGY)
Retirement Pot profile picture
Retirement Pot


  • Compass Group continues to show signs of recovery, but progress in most divisions is slow.
  • Its work on profitability is paying off, which should help cashflow too.
  • However the recent share price run-up values it at 19x the likely earnings when demand recovery is complete, which looks overpriced to me.
  • I don't think it's massively mispriced, but I do see it as overpriced for now, so switch my rating on it to bearish.

U.K.-based foodservice operator Compass Group (OTCPK:CMPGY) shares have gone up handily in recent months. However, the company is exposed to demand recovery in its markets which are largely outside its control. My investment thesis is that the brand name, experience and management mean that this is a solid long-term choice at the right price, as I outlined previously in Compass: Starting To Right Itself, but that for a company with no dividend and earnings recovery likely some years off, the shares look a bit overvalued right now.

Trading Remains Challenged but Profit Margins are Recovering

A trading update last month provided insight into how the business recovery is faring. I would say that the picture is not pretty. While the healthcare and seniors division is basically flat, other divisions continue to be hard hit by falls in demand. The drop off has not been as severe for the past couple of quarters as it was prior to that, but it is still significant.

While volumes remain hard hit, one bright spot is that operating margins are positive once more in all regions. This reflects actions the company took last year, including contract renegotiation and business resizing. The company expressed its confidence in its ability to move the underlying margin above 7%, even without a return to pre-COVID volumes. That is encouraging news.

Source: company trading update

The outlook is portrayed in fairly rosy terms and indeed Compass has excellent form in building a large business through contract wins as well as M&A. But demand is driven here largely by factors outside the company’s control. While its work on costs and margins is a credit to its management, there is not much the company can do to bring revenue back to former levels in many of its contracted locations like canteens or school refectories.

This article was written by

Retirement Pot profile picture
I am a private investor based in the United Kingdom and most interested in equities in the U.K., U.S., Canada and Norway.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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