FTSE 100 contract caterer Compass Group (LSE:CPG) absolutely dominates its industry, but the stock’s faltered this year. So should I buy the dip, or is this a sign of things to come?
It’s fair to say the stock has lost some momentum recently. But I’m very interested in what I think could be a clear path to sustained revenue growth for the long term.
Warning signs
It’s easy enough to see why the stock’s been falling. The underlying business seems to have lost some momentum after a strong recovery coming out of Covid-19.
A key metric for monitoring this is organic revenue growth. This measures how much sales have been increasing by adjusting for acquisitions (more on those later).
| Year | Organic Revenue Growth |
| 2022 | 37.5% |
| 2023 | 19.0% |
| 2024 | 10.6% |
| 2025 | 8.70% |
The firm was never going to keep growing at 37.5% a year. But the rate continues to slow and the stock still trades at a price-to-earnings (P/E) ratio roughly double the FTSE 100 average.
Given all this, investors might well think the stock’s overvalued. In fact though, it’s getting to a point where I’m starting to take it seriously as a potential buy for my portfolio.
A heavyweight
Compass is the largest operator in the contract catering industry. And with revenues roughly equal to its nearest two competitors combined, it’s a true FTSE 100 heavyweight.
That size is a big advantage. Being able to buy ingredients in larger volumes than its rivals gives the company a crucial advantage when it comes to costs.
A decentralised approach means the firm benefits from local and industry-specific knowledge as well as economies of scale. And that’s a powerful combination.
All of this makes Compass very difficult to disrupt and this goes some way towards justifying the relatively high multiple. But there’s also more to the firm’s growth prospects.
Acquisitions
Compass has previously grown by acquiring other companies and management expects this to continue. Investors typically see this as risky though, and justifiably so.
With acquisitions, there’s always a danger of paying too much for a business. But while the risk can’t be eliminated, it can be limited and this is something the firm does very well.
As said, Compass is the largest operator in the contract catering industry, but the firm only accounts for around 11% of the market. And it estimates that 75% consists of local or regional operators.
The company’s ability to add value by incorporating new subsidiaries into its existing network means there could be a lot of scope for growth. This is something to take seriously.
Buy time?
Organic growth might be falling, but I think Compass has a lot of scope for long-term growth. It has a very strong position in an important industry and that’s a valuable combination.
Intrinsically, I think it’s cheap enough for me to buy it, but I’m holding back for now. The question is whether I can find even better value elsewhere – and that might be the case in today’s stock market.
