Investors should feast on food services company Compass (CPG) which has emerged from the pandemic in a stronger position with enhanced growth opportunities and more loyal clients.

Compass believes the global outsourcing market for catering is worth at least £220 billion with around half the market still operated in-house. Increasing complexities facing many businesses across supply chains, regulation and environmental, social and governance factors are accelerating outsourcing wins for the bigger players.

With inflationary pressures continuing to impact global profit margins, Compass sees further opportunities to grab market share as demand from the first-time outsourcing market accelerates. The same factors are also driving client retention with rates for the 2022 financial year up one percentage point to a record 96.4%. All the above factors represent a tasty cocktail of structural growth drivers with the potential to deliver revenue and profit growth above historical rates.

The fly in the ointment is that operating margins are still below pre-Covid levels of 7.5% but management is guiding for margins above 6.5% for 2023 (fourth quarter 2022 margins reached 6.8%) and a gradual recovery toward historic levels. With 2023 sales expected grow by 15% that implies operating profit growth of more than 20% to £1.91 billion argues Greg Johnson at Shore Capital.

Market estimates for earnings per share have increased by 14% over the last year, showing analysts remain behind the curve and this should provide a tailwind for the shares. There was some disappointment at the full year results (21 November) around the margin guidance and lower pace of share buybacks, but CEO Dominic Blakemore told Shares the company was taking a conservative approach and would reassess the pace of buybacks at the first half results on 10 May 2023.

Johnson notes the company returned around £5 billion to shareholders between 2015 and 2019 through dividends and share buybacks. He continues: ‘The business is now materially larger and based on current assumptions, total shareholder returns (including ordinary dividends) could total over £10 billion in the next five years.’

That implies 30% growth or around 5% a year over the next five years. Add in the prospect of higher revenue growth (Johnson is forecasting 7% a year), combined with margin recovery, and it is easy to arrive at earnings per share growth in the high teens percentage-wise.

Compass has become less cyclical over the last decade as more defensive industries such as healthcare and education generate a larger slice of group revenues.

The company has also weathered significant cost inflation through a combination of price, menu management and efficiencies. Its offering remains below high street prices providing a sustainable advantage.

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