Based in Connecticut, Compass Diversified Holdings (CODI) is an investment firm that specializes in acquiring controlling interests in middle market and small market companies (in English: companies with revenues of up to $1 billion) that show profitability and reside in a niche industry. They then work with company management to promote growth and increase cash flow in the intermediate to long term. Currently, they have controlling interest in 8 companies. They are:
- Compass AC Holdings, Inc.--a provider of printed circuit boards
- AFM Holding Corporation--a provider of upholstered furniture
- CamelBak--a provider of hydration packs
- ERGO Baby Carrier, Inc.--a provider of baby wearing products
- Fox Factory, Inc.--a provider of vehicle suspension products
- HALO Lee Wayne LLC--a provider of customized promotional materials
- Liberty Safe and Security Products, LLC-- a manufacturer of home, gun, and office safes
- Tridien Medical-- a manufacturer of medical therapeutic support services and patient positioning devices
Now that, ladies and gentlemen, is a well diversified list. Also, as you can see, the company management really means it when they say they look for a variety of niche industries. Each one of those companies provides a very specific and specialized product, and are leaders in their respective industries.
Now that we've got the basics out of the way, here's what I like about CODI shares:
- Insider ownership has increased 15% in the last 6 months. In fact, in the past 12 months, there have been 28 insider buying transactions versus just 2 insider selling transactions
- They are currently pushing new 52-week highs and are up 18% since January 1st
- The dividend of course! CODI just announced its next quarterly dividend, which will be 36 cents--amounting to an 8.7% annual yield.
- Just as important as the dividend yield is the reliability of the payout. This upcoming dividend will mark the 9th consecutive quarter with a $0.36 distribution, and the 26th consecutive quarter with a dividend of at least $0.30
Since its IPO in 2006, Compass has paid out $9.23 in dividends per share. It has never lowered its dividend and continues to prove its reliability to its shareholders.
Forward looking projections for Compass are positive, and earnings estimates project a near 400% increase between now and next year. It has beaten analyst projections by 20% each quarter for the last 4 quarters, including the latest one, where it clocked in an EPS of $0.36 versus a projected $0.27. On the most recent earnings report conference call, the CEO of CODI, Alan Offenberg, expanded on cash flow, saying,
CODI generated cash flow available for distribution and reinvestment, which we refer to as cash flow, of $14.9 million for the 3 months ended December 31, 2012, an increase of 38.6% from the year-earlier period. For the year, cash flow increased 12.6% to $77.7 million
With increasing cash flow, we can expect that CODI will continue to have the ability to maintain its high dividends.
There are two things I'm cautious about regarding CODI:
- Net income was down last year, and its Debt/Equity ratio is 0.61 which isn't ideal
- Its sole assets are its interests in other companies, so it is dependent upon its companies to generate earnings and distribute them back to CODI, which are then distributed back to CODI shareholders
Neither of these conditions cause me to worry too much, as CODI has a forward P/E of just 9.2 and its holdings continue to show profitability in the short term and long term. Referring back to the recent earnings report conference call, CEO Alan Offenberg said,
Our 4 leading branded product businesses consisting of CamelBak, ERGObaby, Fox and Liberty continue to serve as the main driver of our results. These 4 companies, which represent approximately 2/3 of our subsidiary EBITDA, achieved increases in combined revenue and EBITDA of approximately 18% and 24%, respectively, for the year ended December 31, 2012, as compared to the year ended December 31, 2011. EBITDA margins also expanded to 19.3% for the year ended December 31, 2012, from 18.3% for the year ended December 31, 2011, for these 4 subsidiaries on a combined basis.
In terms of our niche industrial businesses consisting of Advanced Circuits, AFM, Arnold and Tridien, we continue to generate predictable and strong free cash flow. For the year ended December 31, 2012, these 4 businesses, which represent approximately 1/3 of our subsidiary EBITDA, had combined revenue and EBITDA declines of approximately 4.5% and 1%, respectively, for the same 12-month comparison. Of note, however, they produced a combined 14.5% EBITDA margin, an improvement compared to 13.9% for the year ended December 31, 2011.
The Bottom Line
Its stock is currently on the upswing, as share price is up 46% from its 52-week low and is just 0.6% below its 52-week high. CODI is a safe bet for a consistent, high dividend payout and it is going ex-dividend on April 19.