Description

Compass Diversified Holdings (NYSE: CODI)

• 1.6B market cap; 3B EV (debt + preferred)

• Founded 1998 as the private-equity arm of a charitable trust. 

• IPO 2006. Charitable trust still owns 13%, and works out of the same building as management

• 5.5% dividend yield K-1. Will be 4% C-Corp pro-forma. Dividend has been steady for 15 yearS

I will present this opportunity in Q&A form, but highly reccomend investors look at the company's extensive presentations to get a better handle on each individual subsidiary.

Why is this exciting- Why does this opportunity exist?

• ~10x FCF using upper-end of management’s 2021 guide . All companies are cash flowing. High dividend yield in a low yield market

• Changing to C-corp from pass-through in Q3/4. Won’t have tax at corp level sans a gain on sale

• Potential to sell or IPO some holdings into a hot market

• No debt maturities until 2029

• 600mm available on revolver for further opportunities

• Mis-understood company. Sell side coverage from the BDC crowd. 

  Company buys mid-market and does not lend

  Not a RICNo mark-to management/market obscure businesses

• Valuation being centered around NAV, and not FCF or putting a multiple on each business

• M&A obscures results

•  company has to be looked at on a pro-forma basis, which is often only available from investor decks-

• GAAP numbers include lots of D&A, one-time gains/losses etc, and investors need to go below the surface

• Company uses terms such as “subsidiary EBITDA”, “Cash available for distribution”, and makes for a complicated screen

What do they do?

• Buy middle market companies in diverse industries (with a tilt to the outdoor/recreational side of things), manage them, do tuck-ins, and opportunistically sell

• All FCF-positive companies

• Generally require seller to roll forward some equity  

• Keep subs management team intact

• Currently own 10 holdings/subs

• Sold 2 in 2019. Bought 2 in 2020

• Sterno (food warming/lighting), Advanced Circuits (circuit boards), Arnold Magnetics, Altor (foam manufacturer), Liberty (safes), Ergobaby (baby gear), 5.11 (outdoor, professional gear), BOA (dial alternative to shoe laces), Marucci (baseball gear)

• Permanent capital from equity and debt issuances. Use the revolver to move quickly

• Layer subs with intercompany debt. Bring up cash to HoldCo in an efficient manner

• Reduce leverage/revolver upon divestiture, and don’t sit on lots of cash

• Refinanced in Q1, and now have $1bn of debt at 5.25% (vs previous 7-8% cost of debt capital) with nothing due until 2029

Who manages this?

• “External” management team owned by founders etc, with a 2/20 arrangement. 

• 2% is ~$40mm annually, and 20% is post a high water-mark and is essentially only relevant upon disposition, or as a bonus for holding a company and succeeding 

• Elias Sabo, CEO since 2018. Very passionate. Great track record in the things he was involved in. Seems to be focused on the consumer products side

• Heavily incentivized management and their wealth is tied up here 

How have they done-How well will they do?

M&A:

• Have sold larger holdings to public companies (VSTO, TLRY, HSC)

• Some home-runs, like Fox Factory (FOXF) which had an IPO in ~2014

• Some have been disappointing with minimal growth (Tridien- Medical supplies)

• M&A is tied to management’s ability to transact, making it difficult to look back historically when CODI was under a different CEO. The current CEO has done a great job. 2 huge divestitures into a strong market in 2019, and 2 acquisitions in 2020 of strong consumer companies with great growth trajectories

Operational Results:

• Diversity of consumer businesses and industrial businesses offers a healthy balance

• Consumer brands have been growing strongly over the past few years and during the pandemic. Industrials have been pretty flat, and had their challenges during the pandemic - specifically Sterno which is primarily all about events, but have been rebounding.

Cash Flow (AKA: Cash available for distribution/CAD):

• After subs EBITDA, the company deducts corporate costs, management fees, subs taxes, CapEx, interest, and preferred share distributions.

• Lots of financial and operational leverage if EBITDA and the businesses grow. Great set-up 

Anything

• Change to C-Corp will open company to larger shareholder base

  Management expects to pay-out a special dividend of $.88 to cover the step up as the company moves to a C-Corp

  Will maintain a $.25/qualified quarterly dividend going forward, which will net investors $.70 annually, equivalent to the amount they’ve averaged over the past number of years considering all M&A

  C-Corp will now pay tax on gains

• Management has indicated an interest in IPO’ing 5.11

• Multiples are really hot on the consumer side. CODI paid low-teens for its 2 recent acquisitions which are growing rapidly (50% revenue growth. 1000 bps margin expansion Y/Y in Q1)

• Q1’21 results were fantastic. 

• Consumer revenue +33% (pro-forma), Industrial +4%

• Consumer EBITDA +82% (pro-forma), Industrial +0%

• Management increased guidance

Final Thoughts:

I’ll end-off by saying that multiples in the consumer space are very strong. The 2 recent acquisitions were done in the low-teens, and grew 50%+ in rev and 100%+ in EBITDA during Q1 ‘21. 

Industrials likely garner a HSD multiple. 

Backing out all the sale and management costs, there is a lot of equity value here.

Whether you come from a FCF or asset perspective, this company is flying under the radar.

Catalyst

Change to C-Corp

Continued execution

Divestitures/Acquisitions