Compass Group (CPG:LSE) 2005-06-23
Compass is a contract caterer with an International business. It has over 400,000 employees and a turnover of over 12 billion Sterling.
It is a big company, ranked 54th in the FTSE 100.
The company has a complex history. The original company was founded in 1941 to feed wartime munitions workers promised one hot meal a day by legislation.
A lengthy period of acquisitions and mergers followed until in 1987 the company became the subject of a management buy-out. In 1988 it was floated on the London Stock Exchange. It then mounted a substantial series of acquisitions and in 2000 the company merged with Granada.
In 2001, it was demerged to float again on the stock exchange, followed by the continuing story of acquisitions and disposals which brings us up to the present time.
Dividends since the refloat in 2001 have developed quite nicely, from 5.7p in 2001 to 9.3p in 2004. The forecast is for 9.8p in 2005 and 10.4p in 2006.
Earnings per share has been stagnant though. The company would appear to have negative tangible assets because of the enormous amount of goodwill on the balance sheet. Amortisation of this goodwill makes a massive dent in earnings per share, under the old accounting rules. However, one of the consequences of the new International Financial Reporting Standards, in addition to the inclusion of pension scheme deficits as liabilities, is that goodwill amortisation won’t be shown in the profit and loss account in future except for any impairment. The effect will be to cause a substantial rise in earnings per share in the case of Compass, assuming no impairment charge.
Borrowings are high. Gearing is over 100% with around £2.5bn at the interim accounts to 31/03/05 against net assets of £2.5bn of which £4.2bn is intangible.Thus tangible net assets are a negative £1.7bn. All of which is rather a discouragement.
Due, probably, to the stagnant earnings per share, the share price has fallen almost continuously since the refloat in 2001,when they were 571 p at their peak. At the current price, it is not far off the bottom of its range. At a price below 240p it has a relatively high yield (4%) & has got to be a bargain with very limited downside.
Buy Compass Group (CPG:LSE) up to 240p