Compass Diversified Holdings
shares hit an all-time high on Friday, following a strong third-quarter earnings report and improved guidance earlier in the week. They have has returned 39%, including dividends, since Barron’s recommended buying them in May, versus a 7% return for the small-cap
Russell 2000 index.
While another gain of that magnitude over the next five months is unlikely, Compass’ outlook remains attractive—as does the stock’s 6.9% dividend yield.
Compass (ticker: CODI) is a publicly traded holding company that takes a private-equity approach to acquiring, operating, and eventually divesting small- and midmarket companies in a variety of niche industrial and consumer markets. Its eight current subsidiaries are active in businesses from printed circuit boards to baby carriers and gun safes.
Compass’ market value is about $1.2 billion. Its holdings’ combined sales exceeded $1.6 billion over the past four quarters, with earnings before interest, taxes, depreciation, and amortization, or Ebitda, of $189 million.
Since its initial public offering in 2006, Compass has made 19 acquisitions and 11 divestitures, with a recent bias toward selling. Its most recent sale closed in June, when
(HSC) acquired Compass’ recycling and waste-disposal subsidiary Clean Earth for $625 million in cash, netting a $206.3 million realized gain for Compass.
Private valuations in the spaces where Compass plays remain high, CEO Elias Sabo recently told Barron’s, thanks to an abundance of private-equity cash and falling interest rates boosting asset values. That means Compass is likely to remain in divestment mode while focusing on improving and growing operations at its portfolio companies.
One promising subsidiary is 5.11 Tactical, a provider of equipment and apparel used by police, firefighters, and other emergency responders. Since acquiring the business for $400 million in 2016, Compass has been expanding the brand into consumer apparel. That entails building a physical retail presence, opening a fulfillment operation for online sales, and spending on marketing.
The move is paying off: Sales were up 18% in the just-reported third quarter versus the year-earlier period, while Ebitda was 60% higher. 5.11 will end the year with about 60 stores, on the path to a potential 250 to 300 nationally. Sabo says Compass is happy continuing to invest in 5.11 but is always willing to sell at the right price, and could consider an IPO for the business down the line.
The company is also “aggressively” chasing small add-on acquisitions to roll into several of its industrial subsidiaries, Sabo says. Organic growth there has been slower, as the manufacturing economy struggles through trade-war and macroeconomic headwinds.
Compass continues to pay a generous dividend. Its just-raised 2019 guidance implies $1.60 to $1.69 in cash available for distribution per share this year, more than enough to cover the $1.44 in dividend obligations. At its Friday closing price of $20.87, that payout represents a yield of about 6.9%.
Compass used much of the Clean Earth sale proceeds to pay down debt, bringing leverage down to below two times net debt to Ebitda—the lowest it has been in half a decade. When conditions in the private market eventually turn, Compass’ balance sheet has plenty of dry powder to become active in scooping up new businesses at more attractive prices than are available today.
Investors, essentially, are being paid to wait while benefiting from organic improvements at Compass’ portfolio businesses.
Write to Nicholas Jasinski at email@example.com