Shares in Compass Group (LSE:CPG) are up 8% this morning (22 July) after the FTSE 100 contract catering firm released its Q3 results. These were higher than forecast and the company also raised its full-year guidance.
I think the stock is one of the UK’s top growth shares. But with the share price back to where it was in January, I’m working out whether I still have a chance to buy.
Results
The latest news is that organic revenues grew 8.5% during the three months leading up to 30 June. That matches the results the firm reported in the first half of the year.
The company has also (in)creased its guidance for the full year from 7.5% to 8%. And with news of another European acquisition in the pipeline, the report suggests things are going well.
It’s worth noting that organic growth has been slowing substantially over the last few years. Today’s 8.5% is a long way short of the 37% growth Compass achieved in 2022.
That, however, is the result of trading conditions returning to normal after a strong pandemic recovery. And management’s long-term outlook for the business is reasonably positive.
Outlook
Compass expects long-term organic revenue growth to be between 5% and 9% a year. As the firm continues to expand in Europe, I expect a bit more to come through acquisitions.
Widening margins are expected to push earnings per share along slightly faster. And with a policy of distributing 50% of underlying profits as dividends, I expect similar progress on that front.
In other words, growth rates are starting to return to normal. But at a price-to-earnings (P/E) ratio just below 40, the stock isn’t exactly trading at a discount.
I think, however, that the share price is pretty attractive. Today’s increase makes it a bit more expensive, but Compass is still on my list of shares to consider buying when I get the chance.
Investing in Compass
The shares trade at a high P/E multiple, but the firm’s earnings don’t always reflect the cash it produces. It makes around £2bn in free cash and has a market value of just under £43bn.
In other words, the firm makes 4.5% of its share price a year, returns around half to shareholders, and invests the rest for growth. And I expect it to keep growing over time.
Yet there are no guarantees. One way Compass could find itself missing its growth targets is if a global recession puts its customers out of business – and that’s hard to rule out right now.
The pandemic had a huge effect on the business and this illustrates the recession risk. But on the other side of the coin, the recovery over the last five years has also been dramatic.
Competitive strengths
Compass operates in an important industry and has a strong competitive position. People need to eat and the firm benefits from an unmatched size and scale.
This gives it a number of important advantages. Most obviously, it allows the firm negotiating power with suppliers, which it can use to boost its margins or lower costs to customers.
The big question is whether the growth prospects are enough to justify its current share price. It’s a close call, but even after today’s increase, I think it might be. It’s one to consider.
