Compass Diversified Holdings: Overlooked 5.7%-Yielding Stock Raised Guidance
Bullish CODI Stock Up 35% in 2021
If ever there was a time for private equity firms, it’s now. COVID-19 forced many businesses to shut their doors, not because they weren’t well-run companies, but because they didn’t have enough cash to see them through 18 months of zero business. Few did.
As such, there are many great businesses out there looking for private equity firms to help boost their bottom lines and expand their operations.
Compass Diversified Holdings (NYSE:CODI) is one such firm. The company specializes in acquisitions, buyouts, industry consolidation, recapitalization, late-stage investments, and middle-market investments.
Compass Diversified sets itself apart from the rest of its peers by investing in niche industrial or branded consumer companies in sectors such as manufacturing, distribution, consumer product, business services, safety and security, electronic components, food, and food services.
The company seeks out established businesses that are headquartered in North America and have adjusted earnings between $15.0 and $80.0 million, Its preferred transaction size is between $100.0 million and $800.0 million.
Since going public in 2006, Compass Diversified has acquired 21 companies and 28 add-ons. It has sold 11 of those companies, realizing a gain in excess of $1.1 billion. (Source: “CODI Investor Presentation: July 2021,” Compass Diversified Holdings, last accessed July 30, 2021.)
For example, in January 2008, Compass Diversified acquired Fox Factory, Inc., a designer of high-performance suspension products used in mountain bikes, side-by-side vehicles, off-road vehicles, trucks, all-terrain vehicles, motorcycles, snowmobiles, and specialty vehicles.
In March 2010, the company bought Liberty Safe, a market leader in home and gun safes, for $70.0 million. In July 2021, it sold Liberty Safe to an affiliate of Monomoy Capital Partners for $147.5 million in cash. (Source: “Compass Diversified Announces Sale of Liberty Safe,” Compass Diversified Holdings, July 19, 2021.)
In August 2013, Compass Diversified completed an initial public offering (IPO) of Fox Factor Holding Corp (NASDAQ:FOXF). When it exited the position in 2017, it pocketed $527.0 million.
In July 2015, it acquired Manitoba Harvest Hemp Foods, a leader in hemp-based foods, for CA$132.0 million. In February 2019, it sold Manitoba Harvest to Tilray Inc (NASDAQ:TLRY) for $294.0 million.
In April 2020, Compass Diversified Holdings acquired Marucci Sports, LLC for $200.0 million. Marucci is a leading manufacturer and distributor of baseball and softball equipment.
In October 2020, the company acquired BOA Technology Inc. for $454.0 million. BOA designs and markets dial-based closure systems used in footwear, headwear, and medical bracing products.
Compass Diversified Holdings’ current portfolio is made up of 10 companies totaling $2.5 billion in managed assets.
Its strategic acquisitions and divestitures have provided it with healthy cash flow. Over the last eight years, Compass Diversified has generated $1.5 billion in cash flow. This has helped it produce outsized stock-market gains.
Since its IPO, Compass Diversified stock has returned 529%, versus total returns of 293% from the Russell 2000.
CODI stock took a beating during the coronavirus-fueled sell-off in March 2020, but it has rebounded nicely, trading at record levels. As of this writing, Compass Diversified stock is up by:
- Five percent over the last three months
- 21% over the last six months
- 35% year-to-date
- 62% year-over-year
- 160% since March 2020
Chart courtesy of StockCharts.com
As you can see in the following chart, Compass Diversified stock has provided investors with excellent long-term appreciation.
Since the start of 2010, CODI stock has, with dividends reinvested, posted a total return of 415%.
Chart courtesy of StockCharts.com
Compass Diversified Kicked Off 2021 With Record Results & Raised Full-Year Guidance
For the first quarter of 2021, Compass Diversified announced that its net sales jumped by 38.5% year-over-year to $461.6 million. Its net income in the quarter was $22.0 million, a big improvement from the first-quarter 2020 net income of $4.8 million. (Source: “Compass Diversified Reports First Quarter 2021 Financial Results,” Compass Diversified Holdings, April 29, 2021.)
The company’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) in the first quarter of 2021 were $88.0 million, compared to $46.0 million in the quarter ended March 31, 2020. The increase was primarily a result of the company’s 2020 acquisitions of BOA and Marucci, as well as great performances by its branded consumer companies.
For the 2021 first quarter, Compass Diversified Holdings reported cash provided by operating activities of $36.4 million, versus $34.0 million in the quarter ended March 31, 2020. Its cash flow available for distribution and reinvestment (CAD) came in at $46.2 million, compared to $17.6 million in the same prior-year period.
“CODI’s outstanding performance in the first quarter, highlighted by record CAD and strong cash flow growth, was driven by impressive results from our branded consumer businesses, as we increased revenue and earnings across all of our consumer subsidiaries,” said Elias Sabo, CEO. (Source: Ibid.)
During the first quarter, it paid a dividend of $0.36 per share, or $1.44 on an annualized basis, resulting in a yield of 5.7%.
For the second quarter of 2021, Compass Diversified announced the following results:
- Net sales of $487.4 million
- A net loss of $11.3 million
- Adjusted EBITDA of $94.2 million
- Cash provided by operating activities of $73.0 million
- CAD of $46.6 million
(Source: “Compass Diversified Reports Second Quarter 2021 Financial Results,” Compass Diversified Holdings, July 29, 2021.)
As a result of the company’s excellent financial performance and its expectations for the remainder of 2021, Compass Diversified Holdings estimates that its current subsidiaries will produce consolidated adjusted EBITDA of between $350.0 and $370.0 million.
The Lowdown on Compass Diversified Holdings
Compass Diversified Holdings is a great, overlooked, undervalued private equity firm that has been providing buy-and-hold investors with significant capital appreciation and dividend payouts since its IPO in 2006.
Thanks to its strategic acquisitions and divestitures, Compass Diversified stock continues to report great financial results, and the company recently hiked its full-year guidance.