Compass Group (CPG) is one of the largest and most entrenched players in the food-service industry. The company's extensive global footprint serves a diversified mix of sectors and geographies, providing the foundation for a narrow economic moat that produces steady revenue streams and strong cash flows. Combining this dynamic with an asset-light operating structure leads to strong returns on invested capital.
The company's business is moderately tied to both consumer and enterprise-level discretionary spending, which adds some cyclicality. Nevertheless, we believe Compass Group is well positioned to grow as enterprise-level outsourcing gains traction 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 lessening the number of hours employees spend off campus.
Employee food service is not an absolute necessity for most companies, but Compass' cost structure has plenty of levers to pull when the company is faced with 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.
Longer term, we believe Compass still has ample room to grow. The company's global reach makes it one of the few food-service vendors that can efficiently fulfil the needs of multinational companies with diverse locations. There is also opportunity to expand in the health-care and education markets, which still maintain a high percentage of self-operated cafeterias. As costs continue to rise in these sectors, we expect more institutions will recognize the savings potential of outsourcing the food-service function.
We expect that cross-selling support services, such as cleaning and building maintenance, will derive incremental revenue from customers in all sectors and geographies. Although spending in energy and defence sectors has pulled back recently, we still expect that emerging markets with economies tied to natural resource extraction present a good longer-term opportunity for geographic expansion.
