Compass (LSE: CPG) has been serving up a treat for investors over the past year, with the shares rising an appetising 17%. As the world’s largest contract foodservice company, this value stock’s been cooking up a storm in the markets. But after such a hearty run, I’m wondering if it might be time for investors to look elsewhere for their next course.
A great year
Let’s tuck into what’s been driving this stellar performance. The company’s shown remarkable resilience in the face of global economic uncertainties. The latest earnings report revealed a decent 13.8% growth in earnings over the past year. With strong growth in essential products during a period of global uncertainty, it’s no surprise to see the market loving this one.
Operating in over 50 countries and serving up billions of meals annually, the firm’s proven it has a recipe for success. The company’s business model, focused on on-premises catering rather than centralised kitchens, has given it a competitive edge. And it’s not just about the food – management has been expanding its menu of services to include cleaning, office support, and grounds maintenance.
Feeling full?
But here’s where I start to feel a bit full. The shares are currently trading at a price-to-earnings (P/E) ratio of 29 times, which is quite a rich valuation in the sector. Analysts are forecasting about 4% of growth for the shares in the next year or so, which doesn’t inspire me.
Moreover, while revenue growth’s been robust, its profit margins are looking pretty thin. The company’s net profit margin stands at a mere 4.27%. In the cut-throat world of contract catering even a small change in costs could take a big bite out of profits.
The biggest focus for me is the debt on the company’s plate. With a debt-to-equity ratio of 70.5%, the company’s balance sheet isn’t as strong as I’d like for a company which has been in rally mode for the best part of five years. In an environment of economic uncertainty, this level of debt could give investors real heartburn.
Navigating a complex sector
But it’s not all doom and gloom here. Analysts are forecasting earnings growth of 11.99% a year, which suggests there’s still plenty of growth ahead if costs can be managed. The company also offers a dividend yield of 1.9%, providing a little sweetener for income-focused investors.
The management team, led by CEO Dominic Blakemore, has shown they know how to navigate the complex world of global food services. Their focus on expanding into high-growth areas and improving efficiency has kept the company growing through some of the most challenging times for the sector in recent history.
However, after such a strong run, I can’t help but wonder if the shares are due a breather. The market seems to have already recognised a lot of good news, and any stumble in execution could lead to a sharp drop. I certainly don’t want to be joining the party just as the music stops.
In the end, while this value stock’s done well in the market lately, I think the current valuation suggests it might be a bit overcooked. I’ll be keeping it on my watchlist, but won’t be investing any time soon.
This post was originally published on Motley Fool
