Hobson: The Stock Market Doesn't Always Get It Right

THE WEEK: Morningstar columnist Rodney Hobson says the stock market doesn't always get it right, as this week's share price movements for Vodafone and Compass show

Rodney Hobson 17 May, 2019 | 9:45AM

Vodafone

One of the joys of stock market investing is to see a company get up off its knees and go places, so you really have to take your hat off to management at catering group Compass (CPG), where one great set of results follows another.

On an underlying basis, revenue at the contract catering firm was up 6.6% in the six months to March 31, operating profits 5.8% and earnings per share 6.5%. Strong free cash flow means that a rise of 6.5% in the dividend can easily be afforded.

What I like to see is revenue growth in all areas accompanied by strong margins, something Compass seems to be good at achieving. Its portfolio has been tidied up, with disposals offset by bolt-on acquisitions, mainly in North America where organic growth is strongest. For good measure, the underlying figures gained an additional boost from favourable currency movements.

Compass continues to invest in the business, so the good times should roll for a while yet. Indeed, the company has raised its guidance for organic growth for the full year with a promise that margins will be maintained.

The global food services market is estimated to be more than £200bn, of which about half is outsourced to companies such as Compass. Many rivals are small and regional players that can serve niche markets but they lack the competitive power of Compass, the largest player in the global market.

The shares rose from an undeserved trough at 1,485p last October to a slightly ambitious 1,825p at the start of April but they are now back to 1,770p. The total dividend for the year should reach 40p, giving a yield of 2.3%. That is adequate rather than mouth-watering but the optimistic prospects mean the shares are well worth a look.

Vodafone Rises Despite Loss and Dividend Cut

I often comment in this column about the buying opportunities thrown up when perfectly good company results are unfairly greeted with a temporary fall in the share price.

The less pleasant side of the same coin was demonstrated by Vodafone (VOD) when disappointing results and a slashing of the dividend surprisingly prompted a short-lived rise in the share price. Those who took the chance to cut their losses and get out probably did right – once again, I prevaricated and am still in with my stake albeit one that I did halve at the top of the market.

Vodafone shares had slipped, from 143p to 132p, in the days before the results came out because the dividend cut was feared. In the event, a stonking €7.6 billion loss, albeit inflated by one-off items such as the sale of Vodafone India, made the 40% dividend reduction inevitable.

Yet the initial reaction to the results was a 1.4% rise in the share price. I can only assume that some short sellers closed off their positions and took an already sizable profit. If they did, they were premature because common sense soon prevailed and the slide resumed before the day was out. The stock market doesn’t get it right every second of the day but it does get it right sooner or later – in this case sooner.

Despite “deepening customer engagement” – whatever that means – Vodafone is struggling in Spain, Italy and South Africa. Keeping up with the rapidly developing world of mobile phones is expensive, as 5G follows 4G with amazing speed, and Vodafone may not have the wherewithal to cope.

Vodafone shares are now down to 124p and I can’t in all honesty recommend them as a buy. Shareholders will have to grit their teeth, collect the depleted dividend and hope that things start to get better soon.

 

Rodney Hobson is a long-term investor commenting on his own portfolio; his comments are for informational purposes only and should not be construed as investment advice, nor are they the opinions of Morningstar.

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Compass Group PLC1,812.00 GBP0.00
Vodafone Group PLC125.66 GBP0.00

About Author

Rodney Hobson

Rodney Hobson  is a columnist for Morningstar.co.uk and author of several investing books, including The Dividend Investor and How to Build a Share Portfolio.

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