Compass Group, the global catering business, has sailed into something of a short term publicity storm this week over its provision of free school meals to UK schools. Shares in Compass Group have been sliding for a few days now and look as if they might be gathering some short term downside momentum.
The company has been accused by several newspapers and teachers of short changing school children by providing them with inadequate school meal packages. It uses a subsidiary – Chartwells – to supply schools in the UK with catering services. One of the key arguments the British government has made during the pandemic for keeping schools open is so that children from poorer backgrounds can have access to free meals that they need to supplement their diets.
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Substantial ESG questions need to be answered
Compass Group has sailed into something of a perfect storm here. In the middle of a pandemic, with most of the UK in lockdown, these allegations look very concerning to the Department of Education. The Armchair Trader understands that Chartwells has been summoned for discussions by the UK government and that it is conducting its own independent investigation of school meal packages. It is being widely accused in the UK media of profiteering, and pocketing most of the money it receives from the government.
Shares in Compass Group have come off their recent high of 1473p. Stock is well below where it was trading pre-COVID. Looking at recent share price action we can see that volumes are down, and that investors are consistently selling. There has been some buying at around 1405-1410 with a small spike as trading opened this morning, but right now Compass Group stock is sliding as investors digest the news.
Compass Group is, however, a big company, and Chartwells is only a small piece of an international catering empire that employs 600,000 people in 45 countries. Compass Group is very much a global operation. Trouble with one piece of that empire is going to be shrugged off in the medium term.
JPMorgan sets target price of £10
However, we are also living today in a new climate of ESG consciousness, with many big fund managers increasingly being forced to abide by strict ESG criteria. The ‘S’ in that ESG moniker relates to social criteria, and investors and asset managers holding Compass Group stock are going to be wondering exactly what is going on at Chartwells.
Step away from the brewing scandal in the UK and Compass Group is looking further exposed to the pandemic internationally. JPMorgan just issued an underweight rating for the caterer with a 1000p target price, well below where it is trading now. JPMorgan is worried that the move away from in-office catering as more workers plump for the kitchen table, is going to hit a core part of the Compass business, including in the lucrative US office worker market.
Compass Group reported a 20% drop in revenues to £19.9bn in the year to the end of September 2020. Operating profits were off by 82% to £294m. Free cash flow was down 83% to £213m. Investors are not optimistic about getting dividends from their stock any time soon has the company has extensively tapped UK government furlough schemes.
We expect Compass Group to get past the school meals scandal, but changes in working practices further down the road are also going to hurt the company considerably. Short term momentum is expected on the short side, but there could be longer term opportunities for short sellers as the changes to working practices and extended lockdowns of schools and educational facilities make themselves felt in Compass Group revenues.