FTSE 100 contract caterer Compass Group (LSE:CPG) has already been a terrific addition to my Stocks and Shares ISA. But can it continue?
The stock is up 21.18% in the last month, driven by its latest set of results. Despite the rising share price, I’m still looking at adding to my investment.
Simplicity
Compass shows that the best ideas don’t have to be complicated. It’s the industry leader and it uses its size as a weapon.
Scale creates the ability to buy in bulk and pay lower prices than competitors. And that means the firm can charge customers less.
That gives it a big advantage when it comes to winning new business. That increases the company’s scale and the cycle continues.
That’s the basic idea, but Compass has a couple of other moves. One is that it uses acquisitions to give its scale an extra boost.
It also lets other operators use its buying platform – for a fee. This increases buying power as well, but it also pushes down costs.
The business model isn’t complicated, but it is effective. And it’s going from strength to strength right now.
Why is the stock up?
On Monday (11 May) Compass released its results for the six months leading up to 31 March. And they were exactly what investors like to see.
Revenues were up 9% compared to the previous year. Importantly, the majority of this came from existing operations, rather than acquisitions.
In tighter economic conditions, more and more organisations are looking to cut costs. And this can involve outsourcing their catering.
Compass is in a strong position to serve these cost-conscious customers. As a result, the firm is doing well in terms of winning contracts.
One of the benefits of scale is that higher sales lead to wider margins and faster profit growth. This is exactly what happened with Compass.
Earnings per share increased 12%. And in light of the strong results, management also increased its guidance for the full year.
Can it keep going?
Things are going well for the FTSE 100 firm right now, but what happens when that changes? There’s one major issue I’ve got my eye on.
Venues looking to cut costs are generating growth for Compass. But if they can’t do this fast enough and go out of business, sales will fall.
This is a genuine risk for the company. The good news, however, is that it has a lot of scope to offset any lost sales by claiming more market share.
Compass is bigger than its nearest two competitors combined. But it still accounts for less than 15% of the overall market.
That means there’s a lot still to target, either through acquisitions or by competing. Especially if that market continues to grow.
I think this is extremely positive. So the stock stays on my list of positions I’m looking to add to in the near future.
Winning investments
Not every investment in my Stocks and Shares ISA has worked in 2026. But my recent Compass Group buy is off to a good start.
From this point, I’m just looking for it to continue. And if the business keeps doing what it’s doing, I think the share price is likely to follow.
