Should I Buy Compass Group?


LONDON -- It's time to go shopping for shares again, but where to start? There are loads of great stocks to choose from, and I've got my wallet out. So here's the question I'm asking right now: Should I buy Compass Group ?

New direction
I'm feeling peckish for something a little different, and I've got my eye on contract caterer Compass Group, which has just served up a positive start to the year. Should I tuck in?

Food, glorious food
Compass Group employs a mighty 500,000 people across 50 different countries, providing food and support services to businesses, schools, hospitals, universities, and sports and leisure facilities. It serves 4 million meals a year in 50,000 locations as more businesses outsource their catering facilities, and it specializes in feeding hungry workers in remote offshore and mining locations. The group has expanded beyond food to run reception and office services, desk cleaning, and routine maintenance -- all of which I find highly appealing as an investor, because it gives them an almost unlimited market to aim at.

Wizard in Aus
The stock market has also found it highly appealing, and Compass Group's share price has grown steadily since the market lows of March 2009, including a 13% rise since November. The group's interim management statement for 2013, just published, hailed a strong three months, with organic revenue growth of nearly 6%. U.S. growth was particularly meaty, more than offsetting a fall in revenue in Europe and Japan. Compass also performed well in fast-growing and emerging markets, notably Australia, Turkey, and Latin America. The group is working hard to cut its costs, and it plans to invest the savings back into its business, while free-cash-flow conversion remains strong. Management is "positive" about the significant structural growth opportunities in food and support services globally, which should boost revenue and margin growth. The share price rose a little higher.

In a world hungry for yield, I'm a little disappointed by the 2.9% Compass Group offers, covered two times. But management does seem committed to its dividend, raising it 10% last November after posting annual sales growth of 8% and profit growth of 7%. It is also committed to share buybacks. After concluding a 500 million pound share buyback in November 2011, it has just launched a further 400 million pound spree, which started on Jan. 7.

Food for thought
As I'm discovering with more and more strong FTSE 100 players, they're not as cheap as they were. Compass Group currently trades at 18 times earnings. Earnings-per-share growth looks steady at 8% and 11%, respectively, over the next couple of years. This is a strong, solid company whose clients include 90 of the Fortune 100. The market clearly sets a price on this stock, and so do I. I'll be looking for an entry point in the next bout of turbulence.

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Harvey doesn't own any shares mentioned in this article. The Motley Fool has a disclosure policy.We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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