The FTSE 100 has a repute for being regular, somewhat than spectacular, in the case of funding returns. However Compass Group (LSE:CPG) is perhaps an attention-grabbing exception.

Together with the dividend, the inventory has returned over 10% per yr on common throughout what has been an unusually difficult final 10 years. I believe it’s price traders taking a better look.

Contract catering

Compass Group offers catering companies to locations like hospitals, sports activities stadiums, and faculties. In different phrases – locations that might somewhat not be operating their very own meals operations.

One apparent profit to such a enterprise is that it’s not particularly cyclical. No matter’s occurring with inflation or rates of interest, folks nonetheless must eat. 

Whereas there’s competitors on this trade, Compass additionally has an essential benefit over different operators. Particularly, its scale places it in a greater negotiating place with suppliers.

Sturdy established relationships with prospects dedicated to long-term contracts is one other benefit. Importantly, I don’t assume both of those goes to vary any time quickly. 

Progress

Over the past 10 years, Compass has elevated its revenues from round £17.4bn to only below £32bn. However earnings-per-share development hasn’t been so spectacular – going from 54p to 62p.

There’s an enormous – and apparent – purpose for this, which is the pandemic. Folks not going to places of work or reside occasions isn’t good for the agency that gives the catering. 

In consequence, Compass took on debt and issued shares to lift capital. And regardless of each of those coming down in the previous couple of years, the results are nonetheless seen within the agency’s revenue assertion.

That’s why the inventory appears to be like costly at a price-to-earnings (P/E) ratio of 45. However as soon as debt and fairness ranges get better, the a number of ought to retreat to round 29, even with out additional development.

Outlook

A P/E ratio of 29 continues to be excessive – particularly by FTSE 100 requirements – however I believe Compass is an unusually robust enterprise. And its development prospects look significantly spectacular.

The obvious development technique entails profitable new contracts. And with its measurement giving the corporate a value benefit, it’s able to supply aggressive costs to potential prospects.

Acquisitions are additionally a key a part of how Compass grows. Shopping for present companies helps the agency get a foothold in new markets and it could possibly then use its scale benefits to develop. 

This technique might be dangerous – there’s a hazard of overpaying for an acquisition that may’t be ignored. But it surely’s been very efficient for the corporate up to now and I count on it to proceed.

Can the inventory maintain rising?

One of many massive challenges Compass is dealing with in the meanwhile is inflation. Each uncooked supplies and staffing prices are rising and the corporate goes to must discover a strategy to work round this.

That being mentioned, I don’t see obstacles for such a enterprise that come a lot greater than the pandemic. This makes me assume the subsequent decade gained’t be as troublesome because the earlier one.

In consequence, I believe Compass has a great likelihood of being among the best FTSE 100 shares over the subsequent decade and consider traders who haven’t already taken a glance ought to accomplish that.