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This FTSE 100 stock faces a tough time ahead. Would I invest in Compass shares?

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FTSE 100 foodservice company Compass Group (LSE:CPG) has had a tough quarter. Its most recent trading update covered the period to 31 December 2020 (Q1) and was subdued.

The company provide school meals, as well as canteen meals to prisons, hospitals, offices and stadiums. It’s a major UK company with strong government ties, but Covid-19 has decimated much of its business and it cut 7,000 jobs. The vaccine rollout is keeping hopes for a brighter future in sight. But with home working set to continue to some degree, the road to recovery is likely to be slow. In the past five years, Compass shares have risen 15%. But its share price is down 25% in the last year, and fluctuations have been par for the course.

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A defensive FTSE 100 stock

For Q1, it achieved an underlying operating margin of 2.7%, which was slightly above the 2.5% projected. This means all its regions are now profitable after serious cost-cutting and contract negotiations. It benefits from repeat custom and some degree of flexibility to adapt. For instance, it can still deliver packaged meals to replace canteen meals to some extent. While the pandemic is hampering growth in many regions, the global nature of the business means opportunities are appearing too. Management believes there’s a strong pipeline of new business in defensive sectors such as Healthcare & Seniors, Education and Defence, and Offshore & Remote.

In the decade prior to the pandemic, Compass Group was a relatively stable investment. During this time, its share price was on an upward trajectory. Its margins were good and growth was quite easy to come by. But with the world forever changed, its future isn’t looking so bright. And this hasn’t been helped by the damage to its reputation caused by the recent school meals scandal.

Compass Group caught up in scandal

Footballer Marcus Rashford brought to light the shocking inequality present in the country when he pointed out the meagre contents of some government-funded food parcels. Children entitled to free school meals were receiving a food parcel, supposedly worth £30, but the contents told a wildly different tale with a handful of items that would barely amount to £5. The packed lunches were being delivered by Compass Group’s Chartwells division. In its recent trading statement, Compass actually apologised.

Whether this will damage its reputation long term is debatable, but it could certainly hurt its chances of meeting Environmental, Social, and Corporate Governance (ESG) requirements to feature in many of the ESG-friendly investment funds present today.

But it seems to have been more on top of other issues. As far as Brexit goes, the company appeared to have been well prepared. In preparation, the company shifted its supply chains and now over 80% of its food comes from the UK.

In November I thought this looked like it could be a good recovery play for the long term. But I’m no longer watching this stock. The school meals scandal was a big no for me. And aside from that, with Covid-19 running rampant, the group’s growth prospects still hampered, I’ve crossed it off my list. It’s also unlikely to reinstate a dividend until things get back on track. I think there are better UK shares to buy.

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Kirsteen has no position in any of the shares 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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