EUR 850.00 For Business Accounts Only

Morningstar | Compass Appears Well Positioned to Grow

Compass Group is one of the largest and most entrenched food-service providers. Its extensive global footprint serves a diversified mix of sectors and geographies, providing the foundation for a narrow economic moat that generates consistent revenue streams and healthy cash flow. Combining this dynamic with an asset-light operating structure leads to strong returns on invested capital. Demand for Compass' services is moderately tied to both consumer and enterprise-level discretionary spending, which adds some cyclicality. Nevertheless, Compass appears well positioned to grow as enterprise-level outsourcing gains traction for the longer term.The majority of Compass' revenue comes from the business and industry division, which manages corporate cafeterias. Typically provided as an employee perk, in-house food service also has the potential to boost overall productivity by reducing the time employees spend off campus. Employee food service is not an absolute necessity for most companies, but Compass has plenty of cost levers to pull when facing lagging sales or service cutbacks. This can be seen in slow but steady margin expansion during the most recent U.S. and European economic downturns.In the longer term, food service remains a large fragmented global industry that offers Compass ample room to grow. The firm's global reach makes it one of the few vendors that can efficiently fulfil the needs of multinational companies with diverse locations. There is also opportunity to expand in the stable healthcare and education sectors, which maintain a high percentage of self-operated cafeterias. As costs continue to rise in these sectors, we expect more institutions will recognise the savings potential of outsourcing the food-service function. Cross-selling support services such as cleaning and building maintenance will drive incremental revenue from customers in many sectors and geographies. Demand has softened recently in the energy, resource, and defence sectors. We believe emerging markets with economies tied to energy and commodity extraction typically require higher-margin remote and offshore services, and thus offer good longer-term growth opportunities.