Compass Diversified Holdings (NYSE:CODI) describes itself as "an acquirer, owner, and manager of high cash flow, niche leading middle market businesses operating in attractive industries." CODI is thus essentially a public middle-market private equity fund.
The company has done a good job buying and selling businesses with realized gains of $198m on the five businesses CODI has sold since its IPO. Shareholders can profit from owning CODI not only because of its success at buying and selling companies but also from its strong dividend yield. In addition to successfully buying and selling companies, CODI currently pays a quarterly distribution of $0.36/share (that's a yield of 10% at current prices).
Business - well what kind of businesses does this PE fund own?
The company currently owns and operates eight businesses. These businesses, what CODI is trying to do with them and their 2011 revenues and EBITDA are as follows:
- Advanced Circuits - Largest quick-turn, printer circuit board manufacturer in the US with over 300 orders daily; consolidating industry by performing tuck-in acquisitions; 40% EBITDA margins; 2011 Revenue - $78m; EBITDA - $31.7m. (69.4% owned by CODI).
- CamelBak - Provider of personal hydration products (think back packs with a hose pipe, reusable water bottles); broadening international sales and expanding product line into everyday products; 2011 Revenue - $131m; EBITDA - $31.2m. (76.7% owned by CODI).
- Fox Racing Shox - Mountain bike and off-road suspension products; trying to reduce cost of production and build a brand; 2011 Revenue - $198m; EBITDA - $30.8m (67.9% owned by CODI).
- Arnold Magnetic Technologies - Market share leading engineered permanent magnet and magnet assemblies manufacturer; Pursuing acquisitions and an organic growth initiatives along with a sourcing program; 2011 Revenue - $135m; EBITDA - $18m. (96.6% owned by CODI).
- Ergobaby - 20% US market-share in premium baby carriers; working on global distribution and identifying related brand products; 2011 Revenue - $44m; EBITDA - $11.7m. (74.6% owned by CODI).
- Liberty Safe - Market share leading home and gun safe manufacturer; improving national marketing and expanding manufacturing; 2011 Revenue - $82m; EBITDA - $11.6m. (87.6% owned by CODI).
- Tridean Medical - Medical support surfaces (specialty beds, mattress replacements etc.); New product initiative; 2011 Revenue - $56m; EBITDA - $7.8m. (60% owned by CODI).
- American Furniture - Low cost domestic manufacturer of upholstered furniture; working to improve costs and margins; 2011 Revenue - $105m; EBITDA - $(4.2m). (99.9% owned by CODI because of a recapitalization of debt in 2011).
(all numbers from this investor presentation)
CODI is the majority (but not 100%) shareholder and SOLE lender in all these businesses. Subsidiary management is always an investor in the subsidiary (except in the case of American Furniture where the recapitalization has made CODI a 99.9% owner). For 2011, the company's EBITDA would compare to $138.5m. The company's market cap is $680m and its enterprise value is $950m. Thus the company trades at an EV / EBITDA of 6.8x. The consensus 2012 EBITDA estimate is $130m.
(Note - I use 2011 numbers because some of the company's business is seasonal and these numbers adjust for the purchase of Camelbak in August 2011, acquisition of Arnold Magnetics in March 2012, sale of Staffmark in October 2011 and the sale of the Halo in May 2012).
Liquidity - how safe is this dividend?
The company pays a dividend of $0.36/qtr currently. The company has a history of increasing dividend payouts and has paid out $7.80 in dividends since its May 2006 IPO.
CODI had over $22m in cash on March 31, 2012. In April, the company increased its term loan facility by $30m to $255m. At this time the interest rate on the term loan was also reduced by 1.25%. Total long-term debt is about $320m. The company said its liquidity stood at $290m as of its earnings call on May 10, 2012. There are no significant debt maturities until 2016.
In addition, the company's maintenance cap-ex projection for 2012 stood at around $13m and growth cap-ex projection was $6m. In Q1 2012, the company generated $16.6m in cash-flows after accounting for interest, taxes and maintenance cap-ex but not including gains from the sale of business. As long as the operating businesses keep performing, there does not seem to be much liquidity or dividend risk.
The fund is managed by Compass Group Management (CGM). CGM's chairman Mr. Joesph Massoud used to be the CEO of CODI. Last year, he took a leave of absence to focus his attention on an informal regulatory inquiry unrelated to CODI. The company's stock price took a hit on this news and Mr. Massoud has not yet returned.
CGM, management and the board own 18% of CODI. While the high ownership gives us some comfort, management is extraordinarily well paid. CGM receives 2% of book value as a management fee every year and a further 20% of realized gains over a 7% hurdle rate. A fairly typical compensation structure for a private equity fund but pretty nice for a public company.
While the Board and CGM have proven to be very shareholder friendly so far, should a conflict of interest occur between management and shareholders, institutional mechanisms (Board can change terms of shares, Board of Directors fill vacancies, extensive related party transactions, hard to replace management etc.) seem to be in place to ensure that the Board acts in the best interest of CGM (management) and not the shareholder.
A valuation of <7x EBITDA does not strike me as excessive for a company that has been well managed and paid out over 55% of cash flows generated (including gains from sales) over the last six years. In fact, in the current interest rate environment, I would argue that a company paying a relatively safe 10% yield should trade at a higher multiple.
Disclosure: I am long CODI.