Investment Column: Compass Group shares set to go north

Our view: Buy

Share price: 372.4p (+12.8p)

For those who rely on Compass Group for their daily feed, surprises are mostly unwelcome.

Investors in the world's biggest catering business feel the same and so were buoyed by yesterday's trading statement that, according to analysts, caused little cause for concern despite tough trading conditions leading to slowed growth.

Even though Compass has faced falling sales, it deserves credit for improving its margin and, as the watchers at Investec put it, "management of its cost base", which, in English, means making lots of people redundant.

Compass is the sort of stock that punters should consider as a backstop holding: the group will not get mashed when things get very bad, but nor will it ride the waves at the top of the cycle either. Those looking for big highs should avoid the shares, especially with the group saying in yesterday's statement that the "prevailing organic conditions are likely to continue to impact organic growth".

Nonetheless, we would be backers of Compass Group. The group is sufficiently diversified, in sectors such as education and healthcare, to offset disappointing performances in cyclical areas like business and leisure. It can also parade some impressive wins, including the likes of Google in recent months, while a whole raft of analysts were happy to back the company. Those at Investec, who are among the more pessimistic as far as upside is concerned, tell clients to buy: It is a "high-quality core holding", they say.

With the shares trading on a 2009 price earnings rating of 12.7 times, and offering a dividend yield of 3.7 per cent, there are certainly better value stocks around, but like Investec, we would regard Compass as a core holding; an investment to add to the portfolio and not worry about. Investors should take the chance to stock up. Buy

Moss Bros Group

Our view: Hold

Share price: 29p (unchanged)

Like many high-street retailers, Moss Bros has been in fashion with investors recently.

After dropping to a scruffy 8p in late March, the branded suit specialist's shares have smartened up by more than 250 per cent over the past six months. Yesterday, the menswear retailer, best-known for its Moss fascia, posted a better-than-expected loss of £3m for the six months to 1 August, alongside a continued improvement in sales in the first eight weeks of the second half.

There was more good news from Moss Bros, which maintained its gross margin at 56 per cent, despite aggressive price promotions from its competitors. In addition to a restructuring of its supplier base, the company said it had benefited from a hefty investment in sales training in stores, which lifted the number of units sold per transaction. This, in turn, helped to boost overall average transaction values.

In fact, given its robust balance sheet, Moss Bros appears well placed to take advantage of the travails of its independent menswear rivals over the next year. That said, there are several reasons why investors should treat Moss Bros shares with caution. For a start, group like-for-like sales fell by 2.6 per cent over the half-year, despite the improving trend after a weak start.

Retail sales remained in negative territory at its mainstream retail fascias, notably Moss, while they were also down marginally at its Moss Bros Hire business, as fewer corporate black-tie events hit dinner suit hires. While its half-year report led analysts at Numis to adjust their guidance from a pre-tax loss of £7.2m to £6.4m this year, the City still expects Moss Bros to post a pre-tax loss – albeit at an improved rate – for each year to January 2012. But, overall, investors should treat Moss Bros like a reliable suit and hang on to it. Hold.

Mitie Group

Our view: Buy

Share price: 249.8p (-3.5p)

Who would be an investor? Just months ago, columns like this were saying fill your boots with out-sourcing stocks – you can't be safer than buying a company that offers others a way of saving money, we all said.

Those that dutifully followed the advice were then left feeling a little silly as other, perhaps racier stocks, surged over the last few months.

We reckon that any out-sourcing sector investors should hold their nerve, however. Most, including Mitie, which yesterday issued a trading update saying that everything was in line, are likely to cash in next year when public sector budgets are re-written and every mandarin in Whitehall looks for ways of saving money.

Undoubtedly there are stocks that offer better returns, but we reckon Mitie investors will enjoy strong growth over the next 12 months. Buy.

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