Compass Group PLC
Global Quality Growth
Know What You Own
We added Compass Group to the Jensen Global Quality Growth Strategy in April 2020 due to its attractive valuation and sustainable competitive advantages.
Compass is the low-cost leader in the food service industry, able to utilize its superior scale and aggregated buying power to offer the lowest per unit food and supply costs to its clients. The company also has high switching costs due to multi-year contracts and meaningful upfront capital investment provided by Compass to build on-site facilities. This upfront capital allows clients to pay for services over the life of the contract and avoid large initial expenses, which accordingly enables Compass to earn consistent and attractive returns on its investment. Strong, mutually beneficial client relationships have led to high client retention, averaging 94% over the past decade.4
Compass Group is the leading player in non-commercial food services, a £220 billion global market before the COVID-19 pandemic began.5 The structural growth opportunity within an otherwise mature industry is an ongoing trend of first-time outsourcing. The industry remains fragmented, with approximately half of the industry still self-operated.6 The largest growth opportunity remains within two sectors: Healthcare & Seniors and Education, where over 50% of healthcare facilities and schools still manage their food service operations in-house.7
The outsourcing value proposition for corporations, hospitals, schools, and stadiums has long been (1) scale-based cost savings and (2) productivity gains by freeing up resources to focus on respective core competencies. COVID-19 has led organizations to increasingly turn to Compass Group for its best-in-class outsourcing capabilities, including risk mitigation and safety expertise. On recent earnings calls, management noted an acceleration in first time outsourcing within these underpenetrated sectors.8
Compass Group is well-positioned to navigate the pandemic and beyond. Jensen believes a strong balance sheet, with nearly £5 billion in liquidity,9 and a capable management team, with a track record of investing during past crises, point to market share gain opportunities as less advantaged competitors retrench. COVID-19 hit this industry particularly hard, but Compass quickly right-sized its business to restore profitability and cash flow generation. Going forward, we see Compass Group benefitting from a gradual return to normal life. As global economies eventually reopen, we expect sales and margin improvement for Compass to follow.
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1 “FY2020 Factsheet,” Compass Group PLC, 1.
2 Ibid, 1.
3 Ibid, 1.
4 Compass Group Annual Reports, 2010-2019.
5 “Annual Report 2020,” Compass Group, 10.
6 “Performance, People and Purpose,” Strategy & Business Model, Compass Group PLC, March 17, 2021. https://www.compass-group.com/en/ who-we-are/strategy-and-business-model.html.
7 Company Reports, Bernstein Analysis & Estimates, 22.
8 “Sales/Trading Statement Call: Compass Group PLC LSE:CPG,” Transcript Q1 2021 Sales, February 4, 2021, S&P Global Market Intelligence, 5.
9 “Annual Report 2020,” Compass Group, 37.
The company discussion in this article is solely intended to illustrate the application of our investment approach and is not to be considered a recommendation by Jensen. The specific security identified is taken from a representative account of the Jensen Global Quality Growth Strategy and does not represent all of the securities purchased and sold for the Strategy. Our views expressed herein are subject to change and should not be construed as a recommendation or offer to buy or sell any security and are not designed or intended as a basis or determination for making any investment decision for any security. Our discussions should not be construed as an indication that an investment in a security has been or will be profitable, or that the investment recommendations or decisions we make in the future will be profitable or will equal the investment performance of any security discussed herein.
The information contained herein represents management’s current expectation of how the Jensen Global Quality Growth Strategy will continue to be operated in the near term; however, management’s plans and policies in this respect may change in the future. In particular, (i) policies and approaches to portfolio monitoring, risk management, and asset allocation may change in the future without notice and (ii) economic, market and other conditions could cause the Strategy and accounts invested in the Strategy to deviate from stated investment objectives, guidelines, and conclusions stated herein.
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