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Why I reckon this resilient FTSE 100 stock looks set to return to former glories

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Before the pandemic, international food and support services provider and FTSE 100 stock Compass (LSE: CPG) was a consistent growth performer. Indeed, revenue, earnings, cash flow and shareholder dividends all rose incrementally over several years. And the stock rewarded the company’s shareholders by advancing around 450% over a decade.

The share price had been driven by the underlying operational progress and a gradual valuation up-rating. It’s rare for solid growth to go unnoticed by the stock market, and Compass was no exception.

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Why Compass is an FTSE 100 stock I’d buy

However, the Covid-19 crisis hit the stock and the business hard. The share price plunged by more than 50% in the spring. And today’s full-year results report reveals the extent of the financial carnage suffered by the firm. The figures, for the trading year to 30 September, show that revenue slipped by almost 20% compared to the prior year.

That looks relatively modest, but underlying earnings per share crashed by nearly 78%. Free cash flow also plunged by almost 83%. And we can forget the final dividend for the year, it’s toast.

But Compass has been a strong Covid survivor. The company adapted and kept providing its foodservice offering wherever it could. The many staff worked hard to make operations Covid-secure, and the company even managed to renegotiate some of its contracts to allow for the extra costs of the pandemic. All that effort has been worthwhile. In the fourth quarter, the business returned to profitability and is now “cash-neutral”.

The market received the news well this morning, and the share price is up around 5%, as I write. But I think the stock has a long way to travel. At today’s 1,410p, the shares are still almost 30% below their February level near 1,953p.

And, back in February before the crisis hit, chief executive Dominic Blakemore reckons the company was on track to deliver our strongest performance ever.” My guess is the business will unwind from the effects of the pandemic and resume its growth trajectory. And the new vaccine announcements from Pfizer, Moderna and AstraZeneca are encouraging and supportive. If the world can get back to somewhere near ‘normal’, I’d expect demand for the Compass offering to rise.

Improving performance

The signs are good already. For example, through the summer, the company’s performance “began to improve slowly” as it served clients in education, business and industry. If the general return to schools and offices continues, it looks like business will rise for Compass.

Blakemore reckons “the scope for growth from first time outsourcing and (market) share gains is significant.” There’s also a strong pipeline of new business in “Healthcare & Seniors, Education and Defence, Offshore & Remote.”

He thinks the quality of the business is improving and Compass will emerge from the pandemic stronger than it’s ever been. Despite the forward-looking earnings multiple just below 40 for the current trading year, I’m tempted to pick up a few of the shares for the long term. 

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Kevin Godbold has no position in any share mentioned. The Motley Fool UK has recommended Compass Group. 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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