Does the Compass share price make it a hidden FTSE 100 gem?

Revenue, earnings, cash, and dividends all grew strongly in 2023, but the Compass share price dipped on the news. Funny things, markets.

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The Compass Group (LSE: CPG) share price has recovered well since the 2020 stock market crash. But it fell a bit on Monday (20 November), on the back of full-year results.

Earnings up, shares down

At the time of writing, we’re looking at a 4% drop on the day. That’s after the catering group posted a 32.5% jump in underlying earnings per share. On the same basis, revenue rose 18.8%, with free cash flow up 39.4%.

With cash to spare, the firm upped its dividend by 36.8%. That rise comes after a weak spell, and it only means a 2.1% yield. But a growing dividend in these dark times is welcome, and broker forecasts suggest there’s more to come.

New bull run

In fact, forecasts make me think Compass Group could be a great FTSE 100 share to buy for a new bull run. I mean, the Footsie will start on a new run some day, won’t it?

If, and when, markets turn upwards, I guess most growth investors will be looking at FTSE 250 stocks, or smaller-cap ones.

But, especially after a slump, I’d say we should keep our eyes open for FTSE 100 growth too.

Compass doesn’t rely on the UK economy, with operations in more than 50 countries. And I reckon that adds a bit of safety, which has to be a good thing right now.

Full-year focus

The firm’s international scope featured strongly in this latest update.

CEO Dominic Blakemore told us that “North America continued its long track record of excellent growth whilst Europe delivered a second year of net new growth in the 4-5% range.

He also spoke of “another record year of new business wins and continued strong client retention.

He told us we should expect high single-digit revenue growth in the future, with “profit growth ahead of revenue growth and increased cash generation.”

Hmmm, that sounds like slowing revenue growth, which might lie behind the Compass share price fall on the day.

Valuation

Compass has been on a share buyback this year, so it seems to think its shares are good value. I expect quite a few might see the stock’s price-to-earnings (P/E) as a bit toppy now though.

These results put it at 23.4 for the year just ended, based on underlying earnings. And that’s well above the FTSE 100 average.

Forecasts see it dropping as earnings grow, but only down to about 19.5 by 2025. That might still be fair, if the stock has the growth potential that I think I see. But there’s risk here, for sure.

Cost inflation

I think cost inflation could be the biggest risk. It looks like global inflation is starting to cool. But we’re still in early days. And I doubt we’ll see the full effect on consumer businesses for some time yet.

But when it comes to shares with long-term potential in the next stock market bull run, Compass Group makes it onto my watchlist.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Compass Group Plc. 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.

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