Companies don’t always need a flashy business model, or to be operating in the latest hot sector, to produce strong growth from their businesses. Sometimes firms operating in mundane sectors and doing simple things can generate surprisingly robust growth. Take the FTSE 100’s contract food service provider Compass Group (LSE: CPG), for example. Over the past six years, revenue has grown by around 46%, operating cash flow by 70%, and normalised earnings per share has moved 62% higher. Over that period, the directors pushed up the dividend by almost 60%.
Those figures are impressive, and the firm’s shareholders have been rewarded with a 110% uplift in the share price over the period. Who says ‘elephants don’t gallop’? If Compass had been in my portfolio, I’d be pleased with that outcome, which puts many smaller, so-called growth shares to shame.
Steady gains
Today’s full-year report reveals that Compass is still powering forward at full pace. In terms of the underlying figures, revenue lifted 5.5% year-on-year, free cash flow advanced more than 17%, and earnings per share moved 12.5% higher. The directors expressed their confidence in the outlook by pushing up the total dividend for the year by 12.5%.
During the year, around 63% of underlying operating profit came from North America, which makes the region important. Some 22% came from Europe and 15% from the rest of the world. Chief executive Dominic Blakemore said in the report that “healthy” revenue growth had been driven by “excellent” growth in North America, an acceleration in revenue advancement in Europe, and good progress in the rest of the world, so no regions suffered weak trading. However, there was “a more difficult” volume and cost environment in Europe, “especially in the UK.” But the firm achieved some operating efficiencies in the rest of the business that improved margins slightly and offset margin weakness in Europe.
A positive outlook
Blakemore explained that the firm is focusing on food, and disposing of around 5% of revenues from non-core businesses. Yet, the directors are keeping their eyes open for bolt-on acquisition opportunities “that strengthen our offer and meet our strict returns criteria.” Meanwhile, the outlook is positive for 2019. The pipeline of new contracts is “strong,” and the company sees “significant structural growth opportunities globally,” which have the potential to deliver revenue growth, margin improvement, and further returns to shareholders.
Based on the company’s previous form, I think there’s every reason to expect more from Compass over the coming years, and I’d be happy to tuck some of the firm’s shares away for the long haul. The market likes today’s results and the shares look perky. Today’s share price at around 1,643p values the firm at just under 20 times forward earnings for the trading year to September 2019, and the forward dividend yield runs at about 2.6%.
I think the quality of growth on offer reflects in the valuation, but the price-to-earnings ratio has been at a similar level all the way up, so far. I see the stock as attractive.
