Will Vodafone Group Plc, HSBC Holdings plc & Compass Group plc Deliver Stellar Returns?

Three different companies, three different risk profiles: Compass (LSE: CPG), HSBC (LSE: HSBA) and Vodafone (LSE: VOD). They’re unlikely to deliver stellar returns to shareholders, unless a takeover occurs — but which one should you choose right now and why? 

Compass: A Safe Investment

 Compass is a food-service and support services company with a market cap of £16bn and an enterprise value of £18.5bn. Its shares have rallied since 2009 and currently trade at 960p, which is about 8% below the record high they recorded earlier this year. Compass stock still offers value at this level, but it doesn’t promise hefty returns to shareholders, in my view. It trades at about 20x forward earnings and 12x forward adjusted operating cash flow. These are rich trading multiples for a business whose underlying operating profitability and net income margin stand at roughly 7% and 5%, respectively. Compass will need to deliver a faster revenue growth rate if the company is going to create value for shareholders in the next 12 months. A change of ownership is highly unlikely. 

HSBC: Betting On Capital Gains

 Earlier this year, Neil Woodford decided to sell HSBC stock because of “fine inflation”, as he called it. That’s something investors fear, but I reckon Mr Woodford should have stayed invested. HSBC is a safer investment than Barclays, for instance, and is also a better yield play than any other British bank. HSBC doesn’t offer much upside as a takeover target, but its shares could easily appreciate by 10% to 20% to the end of next year in a difficult trading environment for banks. 

Curiously, HSBC hit the headlines in the last 24 hours as two directors of its UK arm are poised to quit in protest “at new Bank of England rules that pave the way for lengthy jail sentences to be imposed on senior managers of failed lenders,” according to Sky News.

“Alan Thomson, a member of the audit and risk committees of HSBC Bank plc, has tendered his resignation (…). John Trueman, the deputy chairman of the legal entity that manages the UK high street and commercial bank, is also understood to be on the verge of resigning, despite having only taken on that role in December last year,” Sky News added.

HSBC would do well to let them go. “Poor bankers” doesn’t spring to mind.

Vodafone: Fading M&A Hopes

There is talk that Vodafone may be a target for AT&T and Softbank, but management at these two companies are occupied with other business right now. There has been lots of M&A talk around Vodafone in the last 12 months, but speculation has contributed to value destruction. In truth, the problem for shareholders is that if an offer doesn’t materialise, Vodafone stock could easily plunge by 20% or more to the end of 2015. Vodafone is in structural decline, and its strategy is unlikely to work, in my view. In fact, Vodafone is one the less appealing stocks in the UK.