The Compass Group (LSE:CPG) share price continued its upward trajectory on the back of its first quarter trading update today (8 February). The food services firm has managed to stay under the radar of most investors. Yet, despite being a relatively dull enterprise, its returns have been anything but.
Over the last 12 months, the group’s market capitalisation has grown by over 17%. And zooming out further reveals even more encouraging performance. Since the outbreak of the pandemic in 2020, the stock has almost doubled, and those who’ve held on for almost two decades have enjoyed near-10-bagger returns.
So are these impressive returns set to continue?
Sustainable double-digit growth
Once again, management’s failed to disappoint. Organic revenue growth across its first quarter results for its 2024 fiscal year (ending in September) landed at 11.7%. On a regional basis, Europe seems to be stealing the show at 13%, with the North American territories coming in last at 11.3%.
Regardless, for a food services enterprise, those are some encouraging numbers. Even more so given that like-for-like volume growth actually came in higher than anticipated while its other growth drivers continue to meet expectations.
As a result, management has re-iterated its previous guidance, with operating profit growth on track to climb 13% by the end of September. That suggests margin expansion is also anticipated throughout the next eight months and is something to watch carefully in the firm’s interim results scheduled for release in May later this year.
What’s the status of the balance sheet?
As trading updates go, Compass Group didn’t provide much details in regards to the state of its financial health. However, it seems management has bought itself some wriggle room regarding its leverage. The latest balance sheet figures currently available are from September 2023. And when including debt equivalents, the firm has around £4.3bn of outstanding loan obligations.
Compared to the £1.9bn in operating profit generated last year, Compass Group doesn’t seem to be in any immediate financial trouble, especially since it just issued another €750m bond maturing in 2031 to refinance another €750m bond that was set to mature in July this year.
That’s undoubtedly provided a bit of breathing space. But with interest rates being significantly higher today than a few years ago, this move may push the firm’s interest expense in the wrong direction, making it potentially harder to achieve its goal of improving profit margins.
The bottom line
All things considered, Compass Group continues to quietly chug along nicely, translating into today’s upward share price momentum. Management continues to execute bolt-on acquisitions to expand its empire and has just completed the $500m share buyback programme launched last November.
The company certainly isn’t without its risks, and the valuation is a bit on the lofty side, with the price-to-earnings ratio now sitting near 30. But with a long track record of exceeding expectations, that might be a price worth considering, in my opinion.
