3 Reasons COMP is Risky and 1 Stock to Buy Instead

Over the past six months, Compass’s shares (currently trading at $5.96) have posted a disappointing 16.9% loss while the S&P 500 was down 3.6%. This was partly due to its softer quarterly results and may have investors wondering how to approach the situation.

Is now the time to buy Compass, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.

Why Is Compass Not Exciting?

Despite the more favorable entry price, we're cautious about Compass. Here are three reasons why there are better opportunities than COMP and a stock we'd rather own.

1. Weak Growth in Transactions Points to Soft Demand

Revenue growth can be broken down into changes in price and volume (for companies like Compass, our preferred volume metric is transactions). While both are important, the latter is the most critical to analyze because prices have a ceiling.

Compass’s transactions came in at 49,121 in the latest quarter, and over the last two years, averaged 6.4% year-on-year growth. This performance was underwhelming and suggests it might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability.

2. Operating Losses Sound the Alarms

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Compass’s operating margin has been trending up over the last 12 months, but it still averaged negative 3.4% over the last two years. This is due to its large expense base and inefficient cost structure.

3. Mediocre Free Cash Flow Margin Limits Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Compass has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 1.3%, lousy for a consumer discretionary business.

Final Judgment

Compass isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 13.7× forward P/E (or $5.96 per share). Beauty is in the eye of the beholder, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.

Stocks We Would Buy Instead of Compass

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