- Compass has significant scale and cost advantages in North America
- Compass has grown sales in each of the past 15 years including during the global financial crisis
Blake Hutchins, co-manager of Troy Income & Growth Trust (TIGT), explains why he invests in catering company Compass (CPG).
"In the current environment, investors are best positioned in large, resilient, high-quality companies that can cope not only with an inflationary backdrop but also potentially a recessionary one, too. One such company is Compass, one of Troy Income & Growth Trust's 10 largest holdings.
"Compass is the leading outsourced catering company globally and can trace its origins back over 80 years. Today, it serves a staggering 5.5bn meals a year across 45 countries and 55,000 clients, the latter including the likes of Google, sporting events such as Wimbledon, and numerous schools, universities and hospitals around the world. Although the company operates in many markets, North America is by far the largest, fastest growing and most important.
"In catering, how you source food is pivotal and it is in supply chain management, particularly in the all important US market, that Compass has a real advantage over its competitors. Under its Foodbuy brand, Compass sources raw food for both its own operations and third-party customers. These third-party customers are not a source of meaningful profit as they are charged little more than cost price. But doing this means that Compass, through Foodbuy, is the largest purchaser of food in North America. This gives the company significant scale and cost advantages over smaller peers. So not only does Compass price business extremely competitively, it also earns industry-leading margins and returns on capital.
"Over the years, Compass has consistently won market share and the good news is that there is plenty more to capture. Over 70 per cent of the global catering market remains 'self-operated' – not yet outsourced – or in the hands of smaller peers which lack Compass's scale. With the cost of food and labour on the rise, Compass offers clients a compelling proposition – the ability to save valuable money and resources.
"Except during the pandemic, when schools closed and sporting events were cancelled, Compass has grown sales in each of the past 15 years, including during the global financial crisis. It pays a growing dividend, twice covered by earnings. And with healthy cash generation and a strong balance sheet the company is also able to buy back its shares or pay special dividends. I expect Compass to not only navigate the current environment, but grow and take market share for many years to come."
Compass was Troy Income & Growth Trust's eighth-largest holding at the end of August, accounting for 3.2 per cent of its assets.
