One Stock Focused on Success and Income

08/31/2011 8:30 am EST


Ian Wyatt

Publisher & Chief Investment Strategist, Wyatt Investment Research

Investors have another chance to get in on this unique company at a great price and a great dividend yield, writes Ian Wyatt of Small Cap Investor PRO.

We are stepping back into Compass Diversified Holdings (CODI). I believe the market has oversold shares of Compass, which now yields north of 10%.

On August 4, I sent out a sell notice for shares of Compass to lock in our total gain of 16.2%. By buying back the stock now, we'll increase our yield on this stock by nearly 3% without missing a single dividend payment.

Compass helps companies achieve success. Of course, every business defines success slightly differently:

  • A private company with a hot new technology and venture capital investors might define success as an Initial Public Offering (IPO).
  • An automotive parts supplier might want each and every part shipped to reach its customer with zero defects.
  • And a medical supply company might define success by the amount of intellectual property it amasses.

Whatever the challenge, each company is different. And it takes a special type of organization to help companies achieve their own vision of success.

That's where Compass Diversified Holdings comes in. Compass specializes in acquiring middle-market businesses—those with enterprise values between $50 million and $250 million—and helping management grow the acquired company to ensure a sustainable stream of cash flow.

The ultimate goal is, in some cases, to divest from the business with a profitable exit or IPO. Since 2007, Compass has recorded gains from the sale of businesses of nearly $110 million.

Along the way, Compass pays regular distributions to shareholders in the form of dividends. Since its IPO in 2006 the company has paid out $6.72 in cumulative dividends. Right now it is paying around $1.44 per share, a handsome dividend.

Since going public it has never decreased its dividend, despite tough economic times in 2008 and 2009. In fact, in the first quarter of 2011 the company increased its quarterly dividend by 6%, to 36 cents per share.

The company's business model may sound familiar to those versed in the operations of private equity and venture capital firms—but there is a difference. Compass typically funds operations and acquisitions with cash, and a dedicated credit facility, rather than through excessive borrowing.

This allows the company to focus on opportunistic acquisitions without having to adhere to unfavorable financing terms from heavy-handed lenders. In the current "credit crisis" environment, this business model affords Compass far more flexibility than competitors who rely on third-party financing.

Currently, management believes it is in a position to complete another acquisition, and the recent market turmoil may present an opportunity that wasn't attractive a couple of months ago.

Compass' business model also allows the company to work closely with the managers of the businesses it owns to achieve success, while being the only lender to the respective company.

What's more, the company gives independent investors a chance to become part owners of the types of companies that are usually reserved for private-equity firms, or family-run operations.

To manage risk, Compass owns companies in a diversity of industries so that economic cycles don't adversely impact all companies at once. There are eight current subsidiaries.

NEXT: A Deeper Look at CODI


Advanced Circuits: Printed Circuit Boards
Based in Aurora, Colorado, this company provides prototype, quick-turn, and production rigid printed circuit boards, primarily in North America. One contributor to growth has been the recent acquisition of Circuit Express into this subsidiary. Advanced Circuits' revenue increased by 3.3% y-o-y in the second quarter of 2011.

Fox Racing Shox: Suspension Products
Fox is based in Watsonville, California, and designs and sells high-end suspension products for mountain bikes, all-terrain vehicles, snowmobiles, and other off-road vehicles. Its products are sold worldwide. In the second quarter of 2011, sales rose by 32.4%, beating analyst expectations.

American Furniture: Furniture
AFM is an Ecru, Mississippi-based, low-cost furniture producer that sells sofas, loveseats, sectionals, and recliners at price points between $199 and $699. The company can ship any current product in the US within 48 hours of receiving an order. This subsidiary is in a slump in a horrible housing market, and lost $1.6 million in the quarter.

Anodyne (Tridien) Medical: Medical Support Products
Tridien is a Coral Springs, Florida-based manufacturer of powered and non-powered medical therapeutic support surfaces. The company serves the acute care, long-term care, and home health-care markets in North America. And Tridien Medical's sales dropped by 16.8% in the quarter—although this performance met expectations.

Staffmark: Temporary Staffing
Staffmark is a human-resources outsourcing firm headquartered in Cincinnati, Ohio. It provides temporary staffing services to around 6,400 corporate and small-business clients in the US.

The big news is that Staffmark filed a Form S-1 for a proposed IPO on April 12. Staffmark brought in $255.64 million in revenues in the first quarter and contributed 26% of EBITDA in 2010. Compass owns 68.3% of Staffmark's common stock, so this IPO would be no small deal.

We don't yet know if and when and IPO would happen, although it is unlikely that Compass would try to do anything in the current market.

Halo: Promotional Products
HALO is headquartered in Sterling, Illinois and offers one-stop shopping for over 35,000 customers, including 700 account executives, looking for all categories of promotional products. In the most recent quarter, sales increased 11.4% to $39.3 million.

Liberty: Premium Safes
The Payson, Utah-based manufacturer and marketer of premium home and gun safes owns a 200,000-square-foot manufacturing plant and primarily sells in North America. In the second quarter of 2011, sales increased by 37.1% to $18.6 million.

ERGObaby makes products that "make babywearing safe, easy, and comfortable". With recent new management additions, revenues increased by 37% in the second quarter—in part propelled by continued strong overseas product sales. This is CODI's most recent acquisition, purchased in September 2010.

With almost 38% potential upside in the stock over the next year, and a 12% yield, investors have potential total returns of around 50% with Compass Diversified Holdings.

I also believe the downside is limited—during the crash of 2008 this stock went to $8. That is approximately 30% below the current price, and provides a reasonable "worst case" scenario that I am extremely doubtful will happen again.

However, keep a stop loss of 20%.

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