Earnings: is it time to buy shares in this impressive FTSE 100 grower?

Strong results and a structural growth opportunity ahead put this top-performing FTSE 100 company on my radar now.

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International food and support services company Compass (LSE: CPG) has been a strong grower in the FTSE 100 index for some time.

Today (20 November), it delivered a robust-looking set of full-year results. However, the share price was weak in early market trading. And that makes the business worth further research now.

A consistent growth record

Quite often the strongest growing companies come from mundane sectors. Compass isn’t a whizzy-dizzy tech, software or pharmaceutical stock. Instead, the business has been grinding out its operations providing an in-demand service for everyday needs around the world. And growth has been organic and acquisitive.

Compass provides contract food and support services to its clients. Operations include restaurants, formal dining, cafés, hospitality services, and vending.  And a vast array of support services include cleaning, building operations, maintenance, logistics, transport, security and outdoor project management.

Clients include hospitals, schools, oil rigs, corporate headquarters, entertainment venues and many others. 

And the stock chart is impressive over multiple timescales:

Meanwhile, the multi-year financial and trading record has supported that upwards share price trend.

There’s been well-balanced and steady growth in revenue, earnings and shareholder dividends apart from a wobble during the pandemic.

The sector has some defensive and cash-generating attributes. The services provided by the business tend to be in evergreen demand. And that situation has enabled the company to keep its net debt small.

Compass also scores well against quality indicators. For example, the return on capital employed is running at about 16%.

However, the market is aware of the attractions of the business and that has led to a full valuation. With the share price near 1,986p, the forward-looking earnings multiple for the current trading year is around 20. That’s set against City analysts’ expectations of an earnings improvement of about 16%.

A positive outlook

Compass is prized by investors. But an elevated valuation does add some risk for new shareholders. On top of that, the business demonstrated its vulnerable side when Covid-19 struck. So future economic shocks will likely have the potential to derail operations, at least for a while.

But today’s figures are good. Chief executive Dominic Blakemore said 2023 was “strong”. And a long record of “excellent” growth continued in the firm’s North American operations.

There was new growth in Europe. And Blakemore pointed to business wins and robust client retention because of “dynamic” trends in outsourcing.

There’s bound to be competition in the sector. But Blakemore thinks size, strength and scale enables Compass to compete with its “sustainable” operating model. 

The company pulled out of nine “tail” countries recently to focus on markets with the greatest growth opportunities. And that kind of nipping and tucking is common among successful businesses aiming to optimise their growth opportunities. 

Looking ahead, Blakemore sees a structural growth opportunity for Compass despite some macroeconomic uncertainty. And there are positive forecasts for revenue, margins and earnings in the current period.

On balance, and despite the risks, I’d be inclined to dig deeper and consider the stock for a long-term diversified portfolio now.

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.

Kevin Godbold 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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