Compass Group - Are there lumps floating in the custard?

Compass Group: Compass seems to sum up the investment conundrum of how high a rating to apply to a share that cranks out reliable growth pretty much year after year. The global trend towards out-sourcing is well established and set to continue. Compass has exploited this superbly, predominantly through food and catering but now also other support service activities. This pre-close statement is fairly brief, but sounds fairly upbeat at group level. A “strong first half” has seen good contract wins and retentions, organic revenue growth of “towards 5.5%” (so maybe a tad lower than that and implying a slight 2Q on 1Q slowdown?) and operating profit margin edging up 10bps. In the geographic breakdown, the largest division, North America has traded well, although a comment that retentions “remained unusually high” must indicate that this is a purple patch of indeterminate length. The next biggest division is the unlikely geographic bed-mates of Europe and Japan. In this division, growth has resumed, with a 10bps margin improvement squeezed out through cost cutting and an efficiency drive. The third leg is Faster Growing and Emerging, where mid-teens organic revenue growth is diluted to 8% by the resource related Australian turndown. In such a multi-national business currency translation swings are part of life, but at the moment are a help to the possible tune of £31m at the bottom line this year. So all this sounds encouraging enough to me, but the outlook for the second half of FY 2014/15 is more cautious citing the resource sector slowdown and a tougher backdrop in emerging market economies. The longer-term prospects are still in place, but it sounds like we are being warned off getting carried away with the second half.

For the year to 30^th September 2015, eps consensus is about 55p for a full-ish looking PE of 21.4x at 1177p. A dividend cover just shy of 2x, suggests a 29.9p dividend for an unremarkable yield of 2.5%. For long run future growth of high single digits these valuations look full, unless you believe that the visibility and reliability of growth justifies paying a premium. Given the more cautious noises from management today, I don’t think that there is any rush to pay up. Compass feels like a stock to put on the list for a market set-back…..if ever we get one. (Neil Cumming^, 30^th March 2015)

These comments are not a personal recommendation to deal. Any investments can fall as well as rise in value, so you could get back less than you invest. I may have a financial interest in some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk  Twitter:  @DividendPower