The “Next” Berkshire Part 4: Compass Diversified Holdings (CODI)
Company Description
Compass Diversified Holdings (CODI) describes itself as an acquirer, owner and manager of growing, niche leading middle market businesses. One of the unique aspects of Compass is its strong disclosure of its subsidiaries, unique for both private equity companies and conglomerates. Compass reports six individual segment reports with management discussion and analysis for each company. I give their CEO Joe Massoud high marks for this type of transparency, and would encourage other public companies to provide this level of transparency. Unlike Berkshire, private equity companies, and other conglomerate type companies, Compass pays a dividend.
Acquisition Criteria
Notice certain recurring themes in the acquisition criteria of these companies. In a wrap up post on key takeaways from these posts, I will compile a list of the investment criteria that these outstanding holding companies tend to generally use.
- Is an established, U.S. based company
- Maintains a significant market share in a defensible industry niche (i.e., has a “reason to exist”)
- Has a solid and proven management team with meaningful incentives
- Has low technological and/or product obsolescence risk
- Maintains a diversified customer and supplier base
- Generates minimum EBITDA of $8 million
Operating Companies
1. CBS Personnel Holdings: a provider of temporary staffing services in the United States.
2. Advanced Circuits: a manufacturer of low-volume quick-turn and prototype rigid printed circuit boards (“PCBs”).
3. Anodyne Medical Device: a manufacturer of medical support surfaces, which are designed to treat and prevent decubitus ulcers, or pressure ulcers, typically formed on immobile patients.
4. Halo Branded Solutions: a leading distributor of customized promotional products.
5. American Furniture Manufacturing: a leading U.S. manufacturer of upholstered furniture, focused exclusively on the promotional segment of the furniture industry.
6. Fox Racing Shox: a designer, manufacturer and marketer of high end suspension products for mountain bikes, all terrain vehicles, snowmobiles and other off-road vehicles.
Comments from Management & Analysts on Current Outlook
From Stifel Nicolaus analyst Greg Mason:
“Its normal yield has been around 8%-9%”
(Source: Barron’s Article: A Poor Man’s Berkshire Hathaway”)
From SMH Capital analyst Will Hamilton:
Potential share catalyst in form of acquisition and if company can “continue to show their ability to generate enough cash flow for distribution”
Hamilton believes that the company has “a very strong management team that we give a lot of credit for in terms of their ability to identify attractive companies while also being very disciplined in how much they pay.”
(Source: Barron’s Article: A Poor Man’s Berkshire Hathaway”)
From Joe Massoud:
“We don’t have a whole lot of leverage, only about $60 million net debt. We don’t have real amortization issues, but we have real liquidity… This is the time to take advantage of less-capitalized competitors.”
(Source: Barron’s Article: A Poor Man’s Berkshire Hathaway”)
Massoud says he is seeing “opportunities from motivated sellers,” especially from “other private equity firms.” He says he likes “basic industry companies; we like recreational products, capital equipment businesses if you don’t over lever the business. You have to be patient to acquire. The key to doing your diligence is to wait until the numbers stabilize a little bit to figure out what the trough will be.” As for CBS Personnel he says that “it leads into a downturn, it leads out of a downturn” because as you go out of a downturn a lot of companies aren’t confident enough to hire full time workers.
(Source: Bloomberg Interview)
“We sit unleveraged. We operate out of a public shell and we have cash… We are looking at add ons to our current business, as well as cyclicals… We expect that by the end of Q2, beginning of Q3 that we are expecting a flattening [in cyclical comps]… American furniture manufacturing is a niche leader at the extreme low end of the furniture segment… Fox makes sort of the highest end of suspension products for bikes”.
(Source: CNBC Interview)
Is an acquisition in the next 3 months imminent?- Disclosures from the Barron’s Article Cited Above
I thought that these disclosures were quite interesting. The article notes that Massoud is looking at companies in cyclical industries as well as in medical devices, and has been hearing from potential sellers. While he says he is waiting until 2H 2009 for acquisitions, an acquisition may come sooner.
Stifel Nicolaus analyst Greg Mason maintains a Hold rating on Compass Diversified shares. Stifel Nicolaus makes a market in the stock and expects to receive compensation for investment banking services from the company over the next three months.
Morgan Keegan analyst Robert Dodd has an Outperform rating on Compass shares. The firm expects to receive investment banking related compensation from Compass in the next three months.
(Source: Barron’s Article: A Poor Man’s Berkshire Hathaway”)