Is Now the Time to Buy Compass?

LONDON -- I'm always searching for shares that can help ordinary investors like you make money from the stock market.

So right now I am trawling through the FTSE 100 and giving my verdict on every member of the blue chip index. Simply put, I'm hoping to pinpoint the very best buying opportunities in today's uncertain market.

Today I am looking at Compass  (LSE: CPG.L  ) to determine whether you should consider buying the shares at 685 pence.

I am assessing each company on several ratios:

  • Price/Earnings (P/E): Does the share look like a good value when compared against its competitors?
  • Price Earnings Growth (PEG): Does the share look like a good value factoring in predicted growth?
  • Yield: Does the share provide a solid income for investors?
  • Dividend Cover: Is the dividend sustainable?

So let's look at the numbers:

Stock

Price

3-Yr. EPS Growth

Projected P/E

PEG

Yield

3-Yr. Dividend Growth

Dividend Cover

Compass Group

685 pence

21%

16.4

2.05

2.9%

46.2 %

2

The average analysts' estimate for this year's earnings per share is 41.8 pence (8% growth) and a dividend per share of 20.8 pence (8% growth).

Trading on a projected P/E of 16.4, Compass looks more expensive than its peers in the leisure goods sector -- who are currently trading on an average P/E of 12.75. Compass' high P/E and single-digit growth rate gives a PEG ratio of 2.05, which implies the share price is expensive for the earnings growth the firm is expected to produce.

Supporting a 2.9% yield, the dividend is below average for the leisure goods sector, which currently offers a 5% average yield. However, Compass has a three-year compounded dividend growth rate of 46%, implying the payout could soon catch up to that of the group's peers.

Indeed, the dividend is twice covered, giving Compass room for further payout growth. Compass is on track to return 500 million pounds to shareholders through share buybacks during 2012, and during the past five years an investment in Compass has returned more than 117%!

Compass looks expensive. Is this justified?
I believe Compass looks expensive, but this is justified by the company's earnings quality. Compass provides a variety of catering services, ranging from school dinners to executive hospitality, and I feel the group has fairly predictable revenues due to its noncyclical nature.

However, Compass' revenue is still feeling the pressure in Southern Europe, although this region makes up only 4% of the group's revenue. On the other hand, revenues in North America are expected to grow 8%, and emerging-market growth is expected to be 12% this year.

Compass still has the ability to significantly increase shareholder value. Indeed, Compass has recently embarked on a worldwide cost-savings plan, which has already offset lower revenues within Europe.

Compass boasts strong cash flow as well as a large cash position, allowing it to embark on a series of takeovers this year. These new acquisitions are already contributing positively to the firm's revenue.

So overall, I believe now looks to be a good time to buy Compass at 685 pence.

More FTSE opportunities
As well as Compass , I am also positive on the blue chips highlighted in "The Market's Top Sectors." This special report sees three Motley Fool Share Advisor analysts each studying a favorable industry -- and spotlighting a particular share to consider for this year and beyond.

Various opportunities are covered in the report. One might provide "solid returns and... nice dividends," another could offer "global diversification and long-term growth potential," while a third looks a "high-quality business" from a battered sector.

You can read "The Market's Top Sectors" today by requesting the report for free. But hurry, the report is available for a limited time only.

In the meantime, please stay tuned for my next verdict on a FTSE 100 share.

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Further Motley Fool investment opportunities:

Rupert Hargreaves owns shares in Compass. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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