Investment Column: More to go for at Compass

Most companies would give their eye teeth to be expanding as fast as Compass. Yesterday the catering group announced a 20 per cent rise in pre-tax profits to pounds 137.2m and an 18 per cent rise in its underlying earnings per share for the year to September.

It was no fluke, with Compass achieving earnings per share growth of 18 per cent each year for the last three years.

There is an argument that Compass may struggle to maintain such a cracking pace. Acquisition opportunities are drying up and it has already made great strides in increasing margins and improving productivity.

That said, there still looks more to go for. Recent acquisitions have given the group much more purchasing power, the benefits of which have yet to feed through to the bottom line. Cutting the number of suppliers and products on offer will also help to raise margins further.

In Germany, for example, it is has been able to slash the number of suppliers from more than 400 to just 10 in the last 12 months.

One obstacle is Sodexho, Compass's arch-rival. It will pose a greater competitive threat, having snapped up the Marriott catering business earlier this year, making it a powerful competitor in the US and a clear market leader in the UK with its Gardner Merchant subsidiary.

However, the catering market is growing so fast that there should be plenty of head room for both companies to expand.

There is also a feeling from some analysts that Compass is in danger of growing just a little bit too fast. A flurry of acquisitions this summer sent some alarm bells ringing which caused the share price to wobble.

However early indications are that the new purchases have bedded down well and Compass seems intent on building up margins rather than relying on more sizeable acquisitions.

BZW forecasts full year profits of pounds 160m rising to pounds 190m in 1999, putting the shares, up 4.5 to 720.5p on a prospective PE ratio of 21, then 18.

This premium rating is deserved. Given Compass's excellent track record the shares still look good value.