Are shares in Compass Group a buy? Your options explained

A caterer that can serve Wimbledon’s strawberries and cream within a few months of doling out hot dogs and pizza at the US Super Bowl must be at the top of its game. More importantly, $42 billion-a-year global revenue shows that Compass has developed a mass catering formula that cuts across cultures and climates.
While occupants of prisons, schools, care homes and barracks had little choice about using Compass canteens during the pandemic, the company inevitably suffered from deserted sports stadia, offices and airports.
Sports fans were the first to get out and about again, followed cautiously by air travellers, though the firm’s North American sports revenue notably declined in the year to this September.
Slowest to recover, given work-from-home’s attractions, has been office and factory workers. But domestic bliss has not been enough to prevent a return to something like normal attendance on Mondays. The laggard is Fridays, though even here Compass detects the slow, steady growth of lunch queues.
In addition to monitoring its rivals’ performance, the management rightly keeps an eye on how its value proposition compares with the high street or local equivalent. Office workers in particular often have convenient alternative meal sources. While Compass insists it does not match prices it comes very close, using scale, buying power and the benefit of using clients’ overheads to keep a lid on food prices.
Investors appreciated last week’s news of operating profits rising from $2.57 billion to $2.99 billion in the year to end-September, on the back of revenue 10.8 per cent higher. While all regions grew, they were led by North America, which edged up to 69 per cent of the total. Europe rose from 22.5 per cent to 23.5 per cent, leaving the rest of the world squeezed.
That is partly because Compass is in the middle of a country shuffle. It has exited Argentina, Angola, Brazil, the United Arab Emirates and mainland China, with Chile, Colombia, Mexico and Kazakhstan to follow shortly. Meanwhile it spent $1.22 billion on acquisitions in the last year, including Germany’s Hofmann-Menü Holdings and Reading-based CH&CO, supplier to Kew Gardens and the Royal Opera House.
Since September the group has bought Dupont Restauration, one of France’s biggest caterers, and is lining up 4Service in Norway. More European purchases are on the cards, helped by free cash flow up from $1.51 billion to $1.74 billion last year. Greater geographical concentration should deliver operating economies. The group also has extensive Asian operations outside China, including Australia, Japan and India. It is not in Russia, Israel or Palestinian territories, but it is elsewhere in the Middle East. These days, any business with a wide international spread is at risk of finding itself in a conflict zone.
There was a brief flurry of disappointment last week on suggestions that short-term growth would slow a little. This was hardly surprising, though, given the multi-country switch. The official expectation is for high single-digit underlying operating profit growth next year, with magnified margins in the longer run, subject always to the impact of climate change on food supplies and prices, and the management has a reputation for conservative forecasting.
There is still plenty to be squeezed from the global catering lemon, in terms of snapping up family firms looking to sell. In March 2023 the stock market, as ever looking ahead, lifted the shares past their £19.50 pre-Covid price for the first time. They have been powering on ever since, reaching a peak of £27.71.
The question meanwhile is whether the shares have leapt too far ahead of events, leaving no room for mishaps. On the basis of profits in the year to last September 30 the price-to-earnings ratio is a steep 41, but the investment bank Jefferies sees that coming down to an historically normal 26 in the year just started. That is still demanding, but the best companies always command a premium.
In May this column rated the shares only a hold because of the likely growth pause, and the price duly shed 100p. However, the greater danger now is that value will be bid away by burgeoning investor enthusiasm.Advice Buy Why The current management is now getting into its stride
Johnson Matthey shares have developed an alarming tendency to lurch downwards at odd times. Most recently this was in the two days leading up to half-year results that the company then described as “resilient”, always a worrying word.
After they hit £32.94 in 2021, this column recommended buying last year at a reasonable-sounding £15.99. They were not too far off that early last week, but more bad news sent the price plunging to £13.18 at one time, a five-year low, before they recovered a little.
Such fluctuations are enough to scare off many investors, but the management is taking steps to steady the ship. The chief executive, Liam Condon, a veteran of the German companies Bayer and Schering, was hired in 2021 to mastermind the transition away from its historic dependence on catalytic converters for petrol vehicles.
Building on existing in-house expertise, Condon’s big bet is hydrogen, which many reckon will be bigger than electricity. The company makes catalysts and processes, components for hydrogen fuel cells, and has new technologies capturing 99 per cent of carbon dioxide. It is a world leader in converting hydrogen into transportable fuel and the clean air business boasts “continued margin expansion driven by efficiency benefits”.
Condon is first carving out £155 million of costs by closing or curtailing redundant operations. That, though, means short-term shareholder pain. As the world is not rushing to buy new cars and vans, lucrative second-hand scrap heaps have been shrinking.
The in-house belief is that enough of the transformation will be completed to maintain profit guidance for the year to end-March. That promised “at least mid-single-digit growth in underlying operating performance at constant precious metal prices and constant currency”, translating to about a £10 million rise in pre-tax profit to £174 million, still a long way from 2023’s £344 million.
Precious metal prices and currencies have been rather less than constant, but an unchanged 22p interim dividend hints that the board will stretch sinews to repeat last year’s 77p total, even if that again exceeds earnings, for a 5.6 per cent yield. Advice Hold Why Wait to see how this year pans out