We Ran A Stock Scan For Earnings Growth And Compass Group (LON:CPG) Passed With Ease
Investors are often guided by the idea of discovering 'the next big thing', even if that means buying 'story stocks' without any revenue, let alone profit. But the reality is that when a company loses money each year, for long enough, its investors will usually take their share of those losses. Loss making companies can act like a sponge for capital - so investors should be cautious that they're not throwing good money after bad.
In contrast to all that, many investors prefer to focus on companies like Compass Group (LON:CPG), which has not only revenues, but also profits. While this doesn't necessarily speak to whether it's undervalued, the profitability of the business is enough to warrant some appreciation - especially if its growing.
Check out our latest analysis for Compass Group
Compass Group's Improving Profits
Even when EPS earnings per share (EPS) growth is unexceptional, company value can be created if this rate is sustained each year. So it's no surprise that some investors are more inclined to invest in profitable businesses. Outstandingly, Compass Group's EPS shot from UK£0.41 to UK£0.74, over the last year. Year on year growth of 81% is certainly a sight to behold. That could be a sign that the business has reached a true inflection point.
Careful consideration of revenue growth and earnings before interest and taxation (EBIT) margins can help inform a view on the sustainability of the recent profit growth. Compass Group maintained stable EBIT margins over the last year, all while growing revenue 41% to UK£30b. That's progress.
You can take a look at the company's revenue and earnings growth trend, in the chart below. To see the actual numbers, click on the chart.
In investing, as in life, the future matters more than the past. So why not check out this free interactive visualization of Compass Group's forecast profits?
Are Compass Group Insiders Aligned With All Shareholders?
Investors are always searching for a vote of confidence in the companies they hold and insider buying is one of the key indicators for optimism on the market. That's because insider buying often indicates that those closest to the company have confidence that the share price will perform well. However, small purchases are not always indicative of conviction, and insiders don't always get it right.
Insiders both bought and sold Compass Group shares in the last year, but the good news is they spent UK£27k more buying than they netted selling. At face value we can consider this a fairly encouraging sign for the company. It is also worth noting that it was Group CFO & Director Charles Brown who made the biggest single purchase, worth UK£53k, paying UK£18.80 per share.
Along with the insider buying, another encouraging sign for Compass Group is that insiders, as a group, have a considerable shareholding. To be specific, they have UK£15m worth of shares. That shows significant buy-in, and may indicate conviction in the business strategy. Despite being just 0.04% of the company, the value of that investment is enough to show insiders have plenty riding on the venture.
Shareholders have more to smile about than just insiders adding more shares to their already sizeable holdings. The cherry on top is that the CEO, Dominic Blakemore is paid comparatively modestly to CEOs at similar sized companies. For companies with market capitalisations over UK£6.6b, like Compass Group, the median CEO pay is around UK£4.2m.
Compass Group offered total compensation worth UK£3.3m to its CEO in the year to September 2022. That is actually below the median for CEO's of similarly sized companies. While the level of CEO compensation shouldn't be the biggest factor in how the company is viewed, modest remuneration is a positive, because it suggests that the board keeps shareholder interests in mind. It can also be a sign of good governance, more generally.
Should You Add Compass Group To Your Watchlist?
Compass Group's earnings per share have been soaring, with growth rates sky high. To make matters even better, the company insiders who know the company best have put their faith in the its future and have been buying more stock. This quick rundown suggests that the business may be of good quality, and also at an inflection point, so maybe Compass Group deserves timely attention. However, before you get too excited we've discovered 1 warning sign for Compass Group that you should be aware of.
The good news is that Compass Group is not the only growth stock with insider buying. Here's a list of them... with insider buying in the last three months!
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
