Up 17% in a year, I think this value stock’s due a breather

A good investor knows it can take time for value stocks to pay off, but this Fool thinks there might be a case for seeking growth elsewhere.

| 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.

Young Caucasian man making doubtful face at camera

Image source: Getty Images

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.

Compass (LSE: CPG) has been serving up a treat for investors over the past year, with the shares rising an appetising 17%. As the world’s largest contract foodservice company, this value stock’s been cooking up a storm in the markets. But after such a hearty run, I’m wondering if it might be time for investors to look elsewhere for their next course.

A great year

Let’s tuck into what’s been driving this stellar performance. The company’s shown remarkable resilience in the face of global economic uncertainties. The latest earnings report revealed a decent 13.8% growth in earnings over the past year. With strong growth in essential products during a period of global uncertainty, it’s no surprise to see the market loving this one.

Created with Highcharts 11.4.3Compass Group Plc PriceZoom1M3M6MYTD1Y5Y10YALL1 Aug 201931 Aug 2024Zoom ▾Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '242020202020212021202220222023202320242024www.fool.co.uk

Operating in over 50 countries and serving up billions of meals annually, the firm’s proven it has a recipe for success. The company’s business model, focused on on-premises catering rather than centralised kitchens, has given it a competitive edge. And it’s not just about the food – management has been expanding its menu of services to include cleaning, office support, and grounds maintenance.

Should you invest £1,000 in Compass Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Compass Group Plc made the list?

See the 6 stocks

Feeling full?

But here’s where I start to feel a bit full. The shares are currently trading at a price-to-earnings (P/E) ratio of 29 times, which is quite a rich valuation in the sector. Analysts are forecasting about 4% of growth for the shares in the next year or so, which doesn’t inspire me.

Moreover, while revenue growth’s been robust, its profit margins are looking pretty thin. The company’s net profit margin stands at a mere 4.27%. In the cut-throat world of contract catering even a small change in costs could take a big bite out of profits.

The biggest focus for me is the debt on the company’s plate. With a debt-to-equity ratio of 70.5%, the company’s balance sheet isn’t as strong as I’d like for a company which has been in rally mode for the best part of five years. In an environment of economic uncertainty, this level of debt could give investors real heartburn.

Navigating a complex sector

But it’s not all doom and gloom here. Analysts are forecasting earnings growth of 11.99% a year, which suggests there’s still plenty of growth ahead if costs can be managed. The company also offers a dividend yield of 1.9%, providing a little sweetener for income-focused investors.

The management team, led by CEO Dominic Blakemore, has shown they know how to navigate the complex world of global food services. Their focus on expanding into high-growth areas and improving efficiency has kept the company growing through some of the most challenging times for the sector in recent history.

However, after such a strong run, I can’t help but wonder if the shares are due a breather. The market seems to have already recognised a lot of good news, and any stumble in execution could lead to a sharp drop. I certainly don’t want to be joining the party just as the music stops.

In the end, while this value stock’s done well in the market lately, I think the current valuation suggests it might be a bit overcooked. I’ll be keeping it on my watchlist, but won’t be investing any time soon.

But what does the head of The Motley Fool’s investing team think?

Should you invest £1,000 in Compass Group Plc right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets.

And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Compass Group Plc made the list?

See the 6 stocks

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.

Gordon Best 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.

Like buying £1 for 51p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this recent ‘Best Buy Now’ has a price/book ratio of 0.51. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 51p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 8.5%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

More on Investing Articles

Investing Articles

At a 52-week low but forecast to rise 73%! Is this growth share the FTSE’s top recovery play? 

This FTSE 100 growth share has taken an absolute beating over the past two years but Harvey Jones says the…

Read more »

Investing Articles

This FTSE 250 share offers a juicy 9.8% yield. Will it last?

This well-known FTSE 250 share has a percentage dividend yield approaching double digits. Should Christopher Ruane add the income share…

Read more »

Investing Articles

Is a £333,000 portfolio enough to retire and live off passive income?

A third of a million pounds can generate a serious amount of passive income, but relying on this sum alone…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing For Beginners

Why FTSE 100 investors should pay attention to ‘Liberation Day’

Jon Smith explains why the upcoming tariff announcement from across the pond could have an impact on the FTSE 100,…

Read more »

Concept of two young professional men looking at a screen in a technological data centre
Investing Articles

Here’s why Nvidia stock fell 13% in March

The Nvidia stock price rise was looking unstoppable. Should investors now be wondering if the same might be true of…

Read more »

US Stock

It’s ISA deadline week! Here’s my 3-step game plan

Jon Smith tries to calm the hype around the last minute ISA rush to buy stocks and explains why he's…

Read more »

Snowing on Jubilee Gardens in London at dusk
Investing Articles

£10,000 invested in BAE Systems shares at Christmas is now worth…

BAE Systems shares have been surging in the FTSE 100 in 2025, driven higher by the wavering US commitment to…

Read more »

Investing Articles

Up 19% in 2 weeks, can the Tesla share price rebound further?

Tesla's first-quarter delivery numbers came out today. Will they help persuade our writer to invest his money at the current…

Read more »