Better Growth, But Sluggish Margins And Higher Leverage, At Compass

I’ve been a fairly harsh critic toward Compass Diversified Holdings (CODI) in the past, mainly because I think management takes a rich private equity-like cut, but without really delivering PE-level returns (Morningstar shows a 10-year average total annual return of just over 8.5%). While the partnership structure has certain advantages, it also is more complicated (forcing investors to deal with K-1’s) and I just don’t think the returns – whether you measure the market returns plus distributions, underlying distributable cash growth, underlying EBITDA growth, or what have you -- are up to snuff.

Nevertheless, results were a little better than I expected in the second quarter and the company continues to deploy capital at a somewhat aggressive pace. The shares are now a little below my estimate of fair value and there could be more momentum in the underlying businesses than in recent past quarters. While I don’t believe distribution growth is likely in the near term, and I would again note that partnerships are not suitable for everybody (or every account), better underlying business momentum could create some more value.

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Better Growth, But Sluggish Margins And Higher Leverage, At Compass