Facing an uncertain and potentially volatile outlook, investors are being forced to weigh in on debates over cyclical versus non-cyclical exposure, yield versus growth, and public versus private market valuations. With
Compass Diversified Holdings,
investors can get a bit of all flavors.
The miniature conglomerate (ticker: CODI) resembles a publicly traded private-equity firm. It acquires, operates, and eventually sells middle-market businesses in several niche consumer and industrial end markets, while paying dividends from subsidiaries’ cash flows. Its current portfolio includes nine businesses, selling goods as diversified as baby carriers, printed circuit boards, molded foam products, and gun safes.
Compass—a publicly traded partnership—had a recent market value of about $1.3 billion. Management flipped two assets in 2019, hemp producer Manitoba Harvest and recycling-and-waste-disposal firm Clean Earth, for a combined $770 million. Compass put those proceeds back to work this year. In April, Compass closed a $200 million acquisition of Marucci Sports, a manufacturer of baseball bats and other gear under the Marucci and Victus brands.
Last month, it signed a deal to buy BOA Technology for $454 million, which it expects to close by the end of this year. The company makes a rotational dial-based alternative to laces or buckles for performance footwear, helmets, and other gear. It boasts roughly 400 brand partners including the likes of
(ADS.Germany), New Balance, and
Both recent deals could help provide Compass with some organically driven growth in the coming years.
Compass was one of Barron’s best-performing stock picks in 2019, returning 66% through year end after we wrote about it that May. But like much of the market, Compass stock had a rough first few months of 2020. After hitting a high of more than $26 in late December, shares dropped to about $11 in late March. They bounced off the lows, and Barron’s again recommended buying Compass stock in April at just over $15. Shares closed at $19.37 on Monday.
There’s still value for investors in Compass stock, which now sports a 7.4% dividend yield. But further price gains may have to wait for fundamentals to lead the way. A rebound at Compass’ industrial businesses should come as the economy recovers and coronavirus-related restrictions are lifted. That’s particularly true at Sterno Group, a maker of candles and other warming tools, which is heavily exposed to the food service industry. With few catered large gatherings and restaurants remaining under pressure, there currently isn’t much need for Sterno’s products.
Compass’ portfolio will also have a meaningfully different composition coming out of the pandemic than it did going in. After the recent sales and acquisitions, its consumer-focused subsidiaries will make up more than half of sales and earnings. That gives Compass greater opportunities to deliver organic growth, but without sacrificing cash flow to maintain its generous dividend.
“It fundamentally changes the complexion of the CODI portfolio,” Compass’ CEO Elias Sabo tells Barron’s. “It gives us a growth component that we never had.”
5.11 Tactical has been the fastest grower in recent years. Originally a provider of equipment and uniforms used by police, firefighters, and other emergency responders, the company has expanded into consumer apparel and products under Compass’ ownership. Plans for Marucci are similar: using its bats’ popularity with professional players to create an aspirational brand positioning and boost sales from amateur players, school leagues, and other baseball consumers.
At BOA, the goal is to gain market share in existing end markets and expand into new ones. The company sees its Fit System taking off in equipment for snowboarding, hiking, golf, bicycling, and more. BOA increased its revenues at an 18% compound annual rate from 2017 to 2019, to more than $100 million in the latest year.
Compass will report third-quarter results on Oct. 28 after the market closes. Wall Street analyst’s consensus estimates are for $375 million in sales and $56 million in earnings before interest, depreciation, taxes, and amortization, or Ebitda—down 4% and 5%, respectively, from a year earlier. Two-thirds of analysts have a Buy or equivalent rating on Compass stock, with the remainder recommending a Hold.
Compass stock has lost about 17% after dividends since the start of the year, versus a 1% loss for the
Russell 2000 index.
has returned 9%.
Write to Nicholas Jasinski at [email protected]