This FTSE 100 stock faces a tough time ahead. Would I invest in Compass shares?

Between Covid-19, Brexit and the school meals scandal, this FTSE 100 stock has had a rough year. Are Compass shares a good investment for me?

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

FTSE 100 foodservice company Compass Group (LSE:CPG) has had a tough quarter. Its most recent trading update covered the period to 31 December 2020 (Q1) and was subdued.

The company provide school meals, as well as canteen meals to prisons, hospitals, offices and stadiums. It’s a major UK company with strong government ties, but Covid-19 has decimated much of its business and it cut 7,000 jobs. The vaccine rollout is keeping hopes for a brighter future in sight. But with home working set to continue to some degree, the road to recovery is likely to be slow. In the past five years, Compass shares have risen 15%. But its share price is down 25% in the last year, and fluctuations have been par for the course.

A defensive FTSE 100 stock

For Q1, it achieved an underlying operating margin of 2.7%, which was slightly above the 2.5% projected. This means all its regions are now profitable after serious cost-cutting and contract negotiations. It benefits from repeat custom and some degree of flexibility to adapt. For instance, it can still deliver packaged meals to replace canteen meals to some extent. While the pandemic is hampering growth in many regions, the global nature of the business means opportunities are appearing too. Management believes there’s a strong pipeline of new business in defensive sectors such as Healthcare & Seniors, Education and Defence, and Offshore & Remote.

In the decade prior to the pandemic, Compass Group was a relatively stable investment. During this time, its share price was on an upward trajectory. Its margins were good and growth was quite easy to come by. But with the world forever changed, its future isn’t looking so bright. And this hasn’t been helped by the damage to its reputation caused by the recent school meals scandal.

Compass Group caught up in scandal

Footballer Marcus Rashford brought to light the shocking inequality present in the country when he pointed out the meagre contents of some government-funded food parcels. Children entitled to free school meals were receiving a food parcel, supposedly worth £30, but the contents told a wildly different tale with a handful of items that would barely amount to £5. The packed lunches were being delivered by Compass Group’s Chartwells division. In its recent trading statement, Compass actually apologised.

Whether this will damage its reputation long term is debatable, but it could certainly hurt its chances of meeting Environmental, Social, and Corporate Governance (ESG) requirements to feature in many of the ESG-friendly investment funds present today.

But it seems to have been more on top of other issues. As far as Brexit goes, the company appeared to have been well prepared. In preparation, the company shifted its supply chains and now over 80% of its food comes from the UK.

In November I thought this looked like it could be a good recovery play for the long term. But I’m no longer watching this stock. The school meals scandal was a big no for me. And aside from that, with Covid-19 running rampant, the group’s growth prospects still hampered, I’ve crossed it off my list. It’s also unlikely to reinstate a dividend until things get back on track. I think there are better UK shares to buy.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kirsteen has no position in any of the shares mentioned. The Motley Fool UK has recommended Compass Group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Finger clicking a button marked 'Buy' on a keyboard
Investing Articles

Analysts have upgraded this FTSE 100 stock to Buy. What should investors do?

Associated British Foods shares have been uninspiring for some time. But is it finally time to consider buying the FTSE…

Read more »

Man changing battery on electric bicycle
Investing Articles

Prediction: in 12 months the sizzling National Grid share price could turn £10,000 into…

It's been another solid year for the National Grid share price and the dividend yield is decent too. So why…

Read more »

Businessman using pen drawing line for increasing arrow from 2024 to 2025
Investing Articles

Up 185% in 3 years, why does the market love this FTSE 250 stock

Over the past three years, this stock has vastly outperformed the FTSE 250. Dr James Fox takes a closer look…

Read more »

A handsome mature bald bearded black man in a sunglasses and a fashionable blue or teal costume with a tie is standing in front of a wall made of striped wooden timbers and fastening a suit button
Investing Articles

Looking for growth, dividends, or value? These 3 ETFs could be smart ideas to consider

Exchange-traded funds (ETFs) provide a way for investors to spread risk without sacrificing the possibility of huge long-term returns.

Read more »

Happy couple showing relief at news
Investing Articles

Is the Rolls-Royce share price fast becoming a joke?

The FTSE 100 engineering titan has done brilliantly in recent years. But our writer wonders whether the Rolls-Royce share price…

Read more »

Middle-aged white male courier delivering boxes to young black lady
Investing Articles

Is there a ‘best age’ to start buying shares?

Christopher Ruane weighs some possible pros and cons of waiting to start buying shares for the first time, versus starting…

Read more »

piggy bank, searching with binoculars
Investing Articles

Is it time to look again at the FTSE 250’s worst performers?

Our writer considers the prospects for two of the worst-performing shares on the FTSE 250, with falls of at least…

Read more »

A handsome mature bald bearded black man in a sunglasses and a fashionable blue or teal costume with a tie is standing in front of a wall made of striped wooden timbers and fastening a suit button
Investing For Beginners

Down over 40% in the past year, I think investors should consider these value shares

Jon Smith points out two value shares that have fallen heavily over the past year but are starting to look…

Read more »