Buy Compass on the hope that Bailey will steer the right course

Crumbs of comfort from Northern Foods; Few attractions so far in Peterhouse's transition

There was much hilarity when the celebrity chef Lloyd Grossman announced, after a tasting tour of the National Health Service, that hospital dinners were no longer the horror show of old. If not exactly haute cuisine, they do at least now provide hot cuisine, and the improvement may be in some small measure down to the likes of Compass Group.

The company, the UK's largest catering business, has been blazing a trail in outsourced food services, not just in the NHS, but in schools and universities and large companies. Its 12-year relationship with BT was extended only yesterday for a further seven years, with Compass agreeing to run all BT's staff canteens and vending machines across all its offices in the UK. Add to that motorway service stations, Upper Crust and Au Bon Pain concessions in railway stations and airports, and other contract catering operations and Compass has a well stocked larder of businesses.

The stock market has never found Compass shares to be particularly moreish, however. This is because the group is yet to muster the cashflows and returns on investment that you might expect from a world leading company in a sector so well insulated from economic vicissitudes. A trading update yesterday gave some comfort that it has been able to improve profitability as promised, though. While it is true that most of the margin gains have come in the UK, where it is still squeezing cost savings from the merger with Granada in 2000, there are more modest improvements in all regions.

Sales growth is also still impressive – 6 per cent overall in the first six months of the financial year, with the best performance in the US, where the outsourcing of food services is not so well developed.

There is plenty of growth to go for because, although Compass is the biggest group of its kind in the world, it still has a market share of just 4 per cent. The benefits of scale should allow it to undercut rivals and continue to win new business.

As long as the management, led by the chief executive Mike Bailey, continues to tick the boxes of most concern to investors, as it did yesterday, there is scope for Compass shares to fulfill the promise this column has, so far vainly, always believed in. Buy.

Crumbs of comfort from Northern Foods

The price of chocolate digestives is going up. Or, as Northern Foods snappily put it yesterday, "whilst biscuit trading remains difficult, the price increases necessary to recover the significant rises in chocolate input costs are being implemented". Or, as long-suffering investors might say, thank Fox's.

Northern Foods' Fox's biscuits business – which is celebrating its 150th anniversary this year – has been struggling with the twin devils of tougher competition (McVitie's stepped up the special offers) and higher raw materials prices (cocoa in particular). Although the biscuit business accounts for just over 10 per cent of Northern Foods' turnover, it was the main reason for a nasty profits warning in January. There was some relief that the group was able to report most chocolate snack producers are now passing on the higher costs. But investor sentiment will take a while yet to recover.

Tough competition and higher raw materials prices are not new in the food sector, of course. One or the other is always present; usually both at the same time. Northern Foods supplies supermarkets with their own-brand prepared foods such as sandwiches for Marks & Spencer, pizza for Tesco and curries for Sainsbury's. Supermarkets will ever be hard taskmasters. And on the costs side there is the national insurance hike next month and the strength of the euro against the pound, which is making imports such as milk and sugar more expensive.

So new investors needn't rush to stock up on Northern Foods shares. They should wait for some sort of restructuring at the group, which many analysts now feel must come one way or another. Existing shareholders, though, can comfort themselves with a pretty decent dividend (the shares yield 7 per cent at the current depressed level – down 3.25p to 120.75p) and the news yesterday that trading has not got worse. Hold.

Few attractions so far in Peterhouse's transition

Peterhouse might have been a little unfortunate to time its switch from construction into support services at the moment the sector fell dramatically from stock market favour. But having sold its construction business, it is now focused on skilled maintenance work for the likes of the rail network and National Grid, and is determined to make a good fist of it. Investors who have not wanted to come along for the ride have sold the stock down heavily over the past year, but the company is ambitious to grow through a mixture of contract wins and acquisitions.

We'll see. It is not going to be plain sailing. Network Rail, the successor to Railtrack, plans to take a lot of the work back in-house following the Potter's Bar rail crash. It also hopes to get remaining private contractors to accept lower margins. But the extent of the change is still unclear (having previously stripped Amey of a maintenance contract, Network Rail had to give it temporarily back yesterday, having failed to employ enough engineers to take over). While the situation is in flux – and until we know the future of Peterhouse's Scottish maintenance contracts which come up for renewal next year – it may still be too early to buy into the new Peterhouse story.

Longer term, there may be good growth from National Grid if it gets round to improving the creaking electricity network. For now, Peterhouse still has issues in some of its smaller businesses and even missed its own broker's profit forecast yesterday. Avoid.