30 March 2015
1yr Target $19.33
1yr Cap Gain 12.71%
1yr Est Tot Return 21.10%
3yr DivGR 0.46%
5yr DivGR 1.14%
Market Cap $932.24 Mil
EPS (ttm) $5.46
Payout Ratio 26.37%
EPS next yr $1.67
Forward P/E 10.27
Sales $982.30 Mil
Income $264.20 Mil
Profit Margin 26.89%
The company’s disciplined approach to the market provides opportunities to methodically purchase attractive businesses at values that are accretive. For sellers of businesses, their unique financial structure allows them to acquire businesses with little or no third party financing contingencies. Compass can also provide ongoing strategic and financial support to those businesses, maintain a long-term outlook as to the ownership of those businesses where such an outlook is required for maximization shareholders’ return on investment, and consummate transactions efficiently without being dependent on third-party transaction financing.
Compass acquires controlling interests in, and actively manages, businesses they believe (1) operate in industries with long-term macroeconomic growth opportunities, (2) have positive and stable cash flows, (3) face minimal threats of technological or competitive obsolescence and, (4) have strong management teams largely in place.
In particular, they believe that their outlook on length of ownership and active management on their part may alleviate the concern that many private company operators and parent companies may have with regard to their businesses going through multiple sale processes in a short period of time. They also believe that this strategy reduces the risk that acquired businesses will be sold at unfavorable prices and it enhances their ability to develop a comprehensive strategy to grow the earnings and cash flows of those businesses.
Compass consists of two product groups each containing four businesses each. Listed below is a description of each of those companies.
Branded Products Businesses
CamelBak Products LLC (“CamelBak”), headquartered in Petaluma, California, is a diversified hydration and personal protection platform offering products for outdoor, recreation and military applications. CamelBak offers a broad range of recreational / military hydration packs, reusable water bottles, specialized military gloves and performance accessories. Compass made loans to, and purchased a controlling interest in, CamelBak on August 24, 2011 for approximately $211.6 million. Compass currently owns 89.9% of the outstanding stock of CamelBak on a primary basis and 79.7% on a fully diluted basis.
Ergobaby Carrier, Inc. (“Ergobaby”), headquartered in Los Angeles, California, is a premier designer, manufacturer and distributor of wearable baby carriers and related baby wearing products, as well as stroller travel systems and accessories. Ergobaby's reputation for product innovation, reliability and safety has led to numerous awards and accolades from consumers, industry experts and publications. Ergobaby offers a broad range of wearable baby carriers, stroller travel systems and related products that are sold through more than 450 retailers and web shops in the United States and internationally. Compass made loans to, and purchased a controlling interest in, Ergobaby on September 16, 2010 for approximately $85.2 million. Compass currently owns 81.0% of the outstanding stock of Ergobaby on a primary basis and 75.0% on a fully diluted basis.
FOX, headquartered in Scotts Valley, California, is a designer, manufacturer and marketer of high-performance suspension products used primarily on mountain bikes, side-by-side vehicles, on-road vehicles with off-road capabilities, off-road vehicles and trucks, all-terrain vehicles, or ATVs, snowmobiles, specialty vehicles and applications, and motorcycles. FOX’s products offer innovative design, performance, durability and reliability that enhance ride dynamics by improving performance and control. The FOX brand is associated with high-performance and technologically advanced products. Compass made loans to and purchased a controlling interest in FOX on January 4, 2008, for approximately $80.4 million. Compass currently own 53.9% of the outstanding common stock on a primary basis and 49.8% on a fully diluted basis.
Liberty Safe and Security Products, Inc. (“Liberty Safe” or “Liberty”), headquartered in Payson, Utah, is a designer, manufacturer and marketer of premium home and gun safes in North America. From it’s over 200,000 square foot manufacturing facility, Liberty produces a wide range of home and gun safe models in a broad assortment of sizes, features and styles. Compass made loans to and purchased a controlling interest in Liberty Safe on March 31, 2010 for approximately $70.2 million. Compass currently owns 96.2% of the outstanding stock of Liberty Safe on a primary basis and 84.8% on a fully diluted basis.
Niche Industrial Businesses
Compass AC Holdings, Inc. (“Advanced Circuits” or “ACI”), headquartered in Aurora, Colorado, is a provider of prototype, quick-turn and volume production rigid printed circuit boards, or “PCBs”, throughout the United States. PCBs are a vital component of virtually all electronic products. The prototype and quick-turn portions of the PCB industry are characterized by customers requiring high levels of responsiveness, technical support and timely delivery. Compass made loans to and purchased a controlling interest in Advanced Circuits, on May 16, 2006, for approximately $81.0 million. Compass currently own 69.4% of the outstanding stock of Advanced Circuits on a primary and fully diluted basis.
AFM Holding Corporation (“American Furniture” or “AFM”) headquartered in Ecru, Mississippi, is a leader in the manufacturing of low-cost upholstered stationary and motion furniture, including sofas, loveseats, sectionals, recliners and complementary products to the promotional furniture market. Compass made loans to and purchased a controlling interest in AFM on August 31, 2007 for approximately $97.0 million. Compass currently owns approximately 99.9% of AFM’s outstanding stock on a primary basis and fully diluted basis.
AMT Acquisition Corporation (“Arnold” or “Arnold Magnetics”), headquartered in Rochester, NY, with nine additional facilities worldwide, is a manufacturer of engineered, application specific permanent magnets. Arnold Magnetics products are used in applications such as general industrial, reprographic systems, aerospace and defense, advertising and promotional, consumer and appliance, energy, automotive and medical technology. Arnold Magnetics is the largest U.S. manufacturer of engineered magnets as well as only one of two domestic producers to design, engineer and manufacture rare earth magnetic solutions. Compass made loans to and purchased a controlling interest in Arnold on March 5, 2012 for approximately $128.8 million. Compass currently own 96.7% of the outstanding stock of Arnold on a primary basis and 87.2% on a fully diluted basis.
Tridien (Anodyne Medical Device, Inc. which was rebranded as “Tridien” in September 2010) headquartered in Coral Springs, Florida, is a leading designer and manufacturer of powered and non-powered medical therapeutic support services and patient positioning devices serving the acute care, long-term care and home health care markets. Tridien is one of the nation’s leading designers and manufacturers of specialty therapeutic support surfaces and is able to manufacture products in multiple locations to better serve a national customer base. Compass made loans to and purchased a controlling interest in Tridien from CGI on August 1, 2006 for approximately $31.0 million. Compass currently own 81.3% of the outstanding capital stock on a primary basis and 66.5% on a fully diluted basis.
As an organizational structure, Compass has few competitors. Other similarly structured holding companies include Nacco Industries and Icahn Enterprises, but they don't compete against each other because of the differences in their subordinate businesses. To determine specific competitors for those subordinate businesses would be too cumbersome to document here and as with all diversified holding companies, their stable of companies is always changing. Therefore their competition also always changes.
I'm intrigued by any company that will increase my wealth at a rate of 8% or more per year. In the case of Compass Diversified Holdings it appears very likely that I can get a minimum dividend yield of 8%. There's also the distinct possibility I could get a 9% dividend yield simply by buying shares with a $16 limit order. The additional benefit here is that this stock may exhibit sufficient price volatility to be either swing traded or simply held for future increases in the price of the stock.
Also, due to its organizational structure and management's success in buying, selling and IPOing subordinate companies, it would be wise for any investor in this company to monitor the company's business activities and press releases closely for information that may affect the price of the stock as well as the dividend.
I expect to initiate a position in this company near the $16 level (9% dividend yield level) with the assistance of the options market and then sit back and collect the dividends as well as sell covered calls to collect the option premiums. Over time I believe this could be a very lucrative investment.