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.

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

Jumbo jet preparing to take off on a runway at sunset
Investing Articles

Down 70%+ since 2020, is IAG’s share price an unmissable bargain?

IAG’s share price is still down around 73% from its pre-Covid level, but with the business performing well last year,…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£17,000 of shares in the FTSE 100 dividend giant can make me £18,874 every year in passive income!

This FTSE 100 dividend superstar has an 8.8% yield with dividends projected to rise. It looks very undervalued to me…

Read more »

Investing Articles

2 top UK growth stocks I’m buying for my Stocks and Shares ISA in July

Looking for UK-listed growth firms to add to a Stocks and Shares ISA? Our writer highlights two he's planning to…

Read more »

artificial intelligence investing algorithms
Investing Articles

This overvalued growth stock makes Nvidia look cheap!

ARM Holdings is a growth stock that’s benefitted from the AI rally. Muhammad Cheema takes a look at whether this…

Read more »

Investing Articles

1 penny stock I’d buy today while it’s 63p

This penny stock's down 70% since last March, yet could be set for a big comeback as the firm rebuilds…

Read more »

Businessman use electronic pen writing rising colorful graph from 2023 to 2024 year of business planning and stock investment growth concept.
Investing Articles

Buying 8,617 Legal & General shares would give me a stunning income of £1,840 a year

Legal & General shares offer one of the highest dividend yields on the entire FTSE 100. Harvey Jones wants to…

Read more »

Man writing 'now' having crossed out 'later', 'tomorrow' and 'next week'
Investing Articles

£25k to invest? Here’s how I’d try to turn that into a second income of £12,578 a year!

If Harvey Jones had a lump sum to invest today he'd go flat out buying top FTSE 100 second income…

Read more »

Union Jack flag in a castle shaped sandcastle on a beautiful beach in brilliant sunshine
Investing Articles

2 lesser-known dividend stocks to consider this summer

Summer is here and global markets could be heading for a period of subdued trading. But our writer thinks there…

Read more »