Compass Diversified Holdings (CODI) is a diverse conglomerate that owns and actively manages a portfolio of leading middle market businesses. The company’s strategic focus on innovation, disruption, and long-term value creation has positioned it as a unique investment opportunity in the diversified holding company space.
Compass Diversified’s Origins and Growth Journey
Compass Diversified was formed in 2005 as a Delaware statutory trust with the goal of acquiring and managing a group of small to mid-sized businesses headquartered in North America. The company’s initial public offering in 2006 provided the capital to execute on this strategy. CODI’s business model involves providing both equity capital and debt capital to acquire controlling interests in its subsidiaries.
The company’s acquisition approach is disciplined and strategic, targeting innovative companies with sustainable competitive advantages and strong growth potential. CODI works closely with the management teams of its subsidiaries to provide both financial and operational support, helping them realize their visions and drive outsized growth through superior execution and a long-term orientation.
CODI’s first acquisition came in 2010 with Ergobaby, a designer and distributor of baby carriers and related products. The company continued to expand its portfolio over the years, acquiring Arnold Magnetics in 2012, Sterno in 2014, 5.11 Tactical in 2016, and Velocity Outdoor in 2017. These acquisitions helped diversify CODI’s business across branded consumer and industrial sectors.
In 2018, CODI acquired Altor Solutions, a designer and manufacturer of protective foam solutions. This was followed by the acquisitions of BOA in 2020 and Lugano Diamonds in 2021, further strengthening CODI’s branded consumer segment. The company faced some challenges in 2023 when it had to record goodwill impairment charges at its Velocity Outdoor and PrimaLoft subsidiaries due to weaker than expected financial performance.
Throughout its history, CODI has maintained a strategy of acquiring well-positioned middle market businesses, providing them with strategic and operational support, and working with their management teams to drive growth. The company has also periodically divested subsidiaries, such as the sales of Crosman in 2024 and Advanced Circuits and Marucci in 2023, in order to optimize its portfolio. CODI has funded its acquisitions through a combination of equity, debt, and cash on hand.
Financial Performance and Strength
Financials
CODI’s financial performance has been impressive, with the company delivering consistent revenue and earnings growth over time. In the most recent quarter, the company reported revenue of $582.62 million and net income of $22.06 million. The company’s operating cash flow for the quarter was negative $29.23 million, while free cash flow was negative $44.82 million.
CODI’s performance in the third quarter of 2024 was particularly strong, with combined revenue growing double digits and adjusted EBITDA growing over 25% compared to Q3 2023. The company achieved a new quarterly record with adjusted EBITDA of $114 million in Q3 2024.
Based on this strong performance, CODI has raised its full-year 2024 guidance. The company now expects consolidated pro forma subsidiary adjusted EBITDA to be between $510 million and $525 million, inclusive of Honeypot as if it was owned from January 1, 2024. Adjusted EBITDA for the branded consumer vertical is expected to be between $390 million and $400 million, while the industrial vertical is projected to generate adjusted EBITDA between $120 million and $125 million. Consolidated adjusted EBITDA, inclusive of corporate costs and management fees of around $90 million, is anticipated to be between $420 million and $435 million. Additionally, CODI expects adjusted earnings to be between $155 million and $165 million for the full year 2024.
Liquidity
CODI’s balance sheet remains strong, with cash on hand of $71.95 million as of the latest reporting period. The company has access to $486.60 million under its 2022 Revolving Credit Facility, providing ample liquidity for future growth initiatives. CODI’s current ratio stands at 4.22, while its quick ratio is 1.62, indicating a solid short-term liquidity position.
Diversified Business Model Provides Stability and Growth Opportunities
Compass Diversified’s diverse portfolio of subsidiary businesses provides stability and growth opportunities across economic cycles. The company’s branded consumer businesses, which include the likes of 5.11, BOA, Ergobaby, Lugano Diamonds, and The Honey Pot Co., have delivered strong performance, with this segment generating $1.36 billion in revenue and $338.84 million in adjusted EBITDA in the latest fiscal year.
5.11, a leading provider of purpose-built technical apparel and gear, reported net sales of $139.22 million in Q3 2024, a 3% increase year-over-year. The company’s gross profit margin improved to 53.7%, driven by less promotional sales and lower off-price selling.
BOA, creator of the patented BOA Fit System, saw net sales increase by 22.3% to $45.61 million in Q3 2024, driven by improvements in end market inventory levels and market share gains. The company’s gross profit margin expanded to 62.9%, benefiting from manufacturing overhead leverage and favorable product mix.
Ergobaby, a designer and distributor of wearable baby carriers and related products, reported net sales of $21.75 million in Q3 2024, a 6.3% decrease year-over-year. Despite the decline, the company maintained a strong gross profit margin of 63.5%.
Lugano, a leading designer and manufacturer of high-end jewelry, saw impressive growth with net sales increasing 50.6% to $118.58 million in Q3 2024. The company’s gross profit margin improved to 60.8%, driven by pricing, product mix, and a decrease in lower-margin wholesale sales.
PrimaLoft, a provider of high-performance synthetic insulation, reported a 25.2% increase in net sales to $13.69 million in Q3 2024. The company’s gross profit margin expanded to 63.2%, benefiting from a favorable product mix.
The Honey Pot Co., a leading better-for-you feminine care brand, saw pro forma net sales increase by 23.4% to $31.55 million in Q3 2024, driven by strong volume gains in its Period Care product line.
Velocity Outdoor, a designer and manufacturer of archery products and hunting apparel, reported net sales of $28.81 million in Q3 2024, a 47.1% decrease year-over-year primarily due to the divestiture of the Crosman airgun division. Despite the revenue decline, the company’s gross profit margin improved to 30.8%.
The company’s industrial businesses, which include Altor Solutions, Arnold, and Sterno, have also performed well, contributing $704.06 million in revenue and $122.98 million in adjusted EBITDA. The recent acquisition of Lifoam by Altor Solutions is expected to further strengthen this segment, as the company looks to capitalize on growth opportunities in the temperature-controlled packaging market.
Altor Solutions, a designer and manufacturer of custom molded protective foam solutions, reported net sales of $52.13 million in Q3 2024, a 12% decrease year-over-year due to shifting market conditions in the food delivery and cold chain end markets.
Arnold, a global solutions provider and manufacturer of engineered products, saw net sales increase by 10.3% to $46.10 million in Q3 2024, driven by higher demand in the aerospace, defense, and oil and gas markets.
Sterno, a leading manufacturer of portable food warming systems and related products, reported a 6.2% increase in net sales to $85.19 million in Q3 2024, driven by higher sales volume at the Rimports division.
Proven Management Team and Shareholder-Friendly Initiatives
Compass Diversified is led by a highly experienced management team, headed by CEO Elias Sabo, who has been with the company since its inception. The team has a proven track record of successfully acquiring, integrating, and operating a diverse portfolio of businesses, leveraging their deep expertise to drive both organic and inorganic growth.
In addition to its operational prowess, CODI has also demonstrated a commitment to shareholder value creation. The company has paid a quarterly dividend since going public, with the current annualized dividend rate standing at $1.00 per share. CODI has also recently announced a $100 million share repurchase program, further underscoring management’s confidence in the company’s long-term growth prospects.
Risks and Challenges
Like any diversified holding company, Compass Diversified faces a range of risks and challenges. These include macroeconomic headwinds, such as inflationary pressures and supply chain disruptions, as well as execution risks associated with the integration and management of its subsidiary businesses.
CODI is also exposed to industry-specific risks within its various end markets, ranging from increased competition and regulatory changes to shifts in consumer preferences. The company’s acquisition strategy, while a key growth driver, also carries inherent risks related to valuation, integration, and the identification of suitable targets.
Outlook and Conclusion
Despite the challenges, Compass Diversified’s diverse business model, proven management team, and shareholder-friendly initiatives position the company for continued success. The company’s recent guidance update, which calls for consolidated adjusted EBITDA between $420 million and $435 million for the full year 2024, underscores the strength and resilience of CODI’s operating businesses.
As Compass Diversified continues to execute on its strategic vision of owning and actively managing a portfolio of innovative, market-leading businesses, the company remains well-positioned to drive long-term value creation for its shareholders. With a focus on disciplined capital allocation, operational excellence, and a collaborative approach to working with its subsidiary management teams, CODI stands out as a unique and compelling investment opportunity in the diversified holding company space.
Disclaimer: This article is for informational purposes only. It does not constitute financial, legal, or other types of advice. While every effort has been made to ensure the accuracy of the information presented here, the author and the publisher do not make any guarantees about the completeness, reliability, and accuracy of this information.