Breaking Down Compass Diversified (CODI) Financial Health: Key Insights for Investors

Understanding Compass Diversified (CODI) Revenue Streams

Understanding Compass Diversified’s Revenue Streams

Primary Revenue Sources:

• Branded Consumer Businesses: Net sales were $139.2 million for the three months ended September 30, 2024, compared to $135.2 million for the same period in 2023, an increase of 3.0%.
• Industrial Businesses: Net sales were $85.2 million for the three months ended September 30, 2024, an increase of 6.2% compared to the same period in 2023.
• International Sales: Increased by 10.4% to $14.3 million in the third quarter of 2024.

Year-over-Year Revenue Growth Rate:

For the nine months ended September 30, 2024, net sales were $387.4 million, a slight increase of 0.4% from $385.7 million for the same period in 2023.

Contribution of Different Business Segments to Overall Revenue:

Analysis of Significant Changes in Revenue Streams:

The increase in revenue was primarily driven by a $8.5 million increase in international sales and a $1.5 million increase in direct-to-agency sales, attributed to fulfilling large contracts. However, this was offset by a $7.9 million decrease in direct-to-consumer sales.

For the nine months ended September 30, 2024, the gross profit was $208.1 million as compared to $203.2 million for the same period in 2023, an increase of $4.9 million.

Segment Operating Income:

Segment operating income for the nine months ended September 30, 2024, was $33.8 million, an increase from $31.7 million for the same period in 2023.

Summary of Revenue Performance:

The total revenue for the three months ended September 30, 2024, was $139.2 million, which reflects a strong performance across most segments, despite the decline in direct-to-consumer sales.

Overall, the company continues to see positive trends in its revenue streams, particularly from international sales and direct-to-agency contracts, which are vital for sustained growth.

A Deep Dive into Compass Diversified (CODI) Profitability

A Deep Dive into Compass Diversified's Profitability

Gross Profit Margin: For the three months ended September 30, 2024, gross profit was $21,124 thousand, yielding a gross profit margin of 24.8%, compared to $19,749 thousand and 24.6% for the same period in 2023. For the nine months ended September 30, 2024, gross profit was $58,813 thousand with a margin of 26.3%, up from $55,788 thousand and 24.3% in 2023.

Operating Profit Margin: The segment operating income for the three months ended September 30, 2024 was $6,971 thousand, representing an operating margin of 8.2%, versus $6,438 thousand or 8.0% in 2023. For the nine-month period, operating income rose to $19,626 thousand, yielding a margin of 8.8%, up from $18,019 thousand and 7.8%.

Net Profit Margin: The net income for the three months ended September 30, 2024 was $31,461 thousand, translating to a net profit margin of 5.4%. This is an improvement from a net loss of $3,760 thousand in the same quarter of 2023. For the nine months ending September 30, 2024, net income was $23,519 thousand, compared to $122,964 thousand in 2023.

Trends in Profitability Over Time

Over the last year, there has been a noticeable improvement in gross profit margins, increasing from 24.3% to 26.3% for the nine-month period. This trend suggests enhanced operational efficiency and cost management strategies.

Comparison of Profitability Ratios with Industry Averages

As of September 2024, the gross profit margin of 26.3% exceeds the industry average of approximately 25.0%. The operating margin of 8.8% also surpasses the industry average of 7.5%, indicating a robust position against peers.

Analysis of Operational Efficiency

The selling, general and administrative (SG&A) expenses for the three months ended September 30, 2024, amounted to $9,915 thousand, or 11.6% of net sales, compared to $9,073 thousand and 11.3% in the previous year. This slight increase in SG&A as a percentage of sales indicates a focus on enhancing operational capabilities while managing costs effectively.

Debt vs. Equity: How Compass Diversified (CODI) Finances Its Growth

Debt vs. Equity Structure

The company maintains a diverse financing structure, consisting of both debt and equity, to support its growth and operations. As of September 30, 2024, the total debt stood at $1,776.2 million, which includes:

• $1,000 million in 5.250% Senior Notes due 2029
• $300 million in 5.000% Senior Notes due 2032
• $377.5 million outstanding on the 2022 Term Loan
• $110 million drawn from the 2022 Revolving Credit Facility

The company’s long-term debt is structured to mature over several years, with significant repayments scheduled as follows:

The debt-to-equity ratio, a critical measure of financial leverage, was approximately 1.43 as of September 30, 2024. This ratio reflects a balanced approach to financing compared to industry standards, which typically range from 1.0 to 2.0.

Recent debt activities include the issuance of the 2032 Senior Notes, which were utilized to refinance existing debt and optimize the capital structure. The company holds a stable credit rating, allowing it to access favorable borrowing terms. As of the latest assessment, the company has an investment-grade rating, which enhances its capacity to issue future debt without significantly increasing its cost of capital.

To maintain a robust capital structure, the company actively manages its mix of debt and equity. The preferred shares issued include:

• $100.2 million of Trust Preferred Shares
• $107.0 million of Series B Preferred Shares
• $123.7 million of Series C Preferred Shares

Equity contributions also come from noncontrolling interests, which amounted to $264.9 million as of September 30, 2024. This diverse financing strategy provides the flexibility to fund acquisitions, such as the recent purchase of The Honey Pot Co., which was financed using cash reserves and equity contributions from noncontrolling shareholders.

The company’s overall financial health is supported by disciplined capital management, allowing it to strategically balance debt financing with equity funding to support its long-term growth objectives.

Assessing Compass Diversified (CODI) Liquidity

Assessing Compass Diversified's Liquidity

Current and Quick Ratios

As of September 30, 2024, the current ratio of Compass Diversified is approximately 1.23, indicating that the company has $1.23 in current assets for every $1.00 of current liabilities. The quick ratio stands at 0.79, suggesting that when excluding inventory, the company has $0.79 in liquid assets available to cover each $1.00 of current liabilities.

Analysis of Working Capital Trends

Working capital as of September 30, 2024, is reported at $130.5 million, a decrease from $180.3 million the previous year. This decline reflects a significant increase in current liabilities, primarily driven by the company's recent acquisition activities, including a notable cash outflow for inventory build-up.

Cash Flow Statements Overview

For the nine months ended September 30, 2024, cash flows from operating activities showed a net outflow of ($77.6 million), compared to a positive inflow of $56.9 million for the same period in 2023. This shift is largely attributed to increased cash used for working capital, which totaled $253.9 million in 2024, up from $128.9 million in 2023.

Cash Flow from Investing Activities

Investing activities resulted in a cash outflow of ($352.3 million) in the first nine months of 2024, as opposed to cash inflow of $104.3 million in the prior year, reflecting significant acquisitions including The Honey Pot Co.

Cash Flow from Financing Activities

Cash provided by financing activities was $50.9 million for the nine months ending September 30, 2024, in contrast to cash used of ($157.9 million) in the same period of 2023. This change is primarily due to new borrowings of $110 million against the revolving credit facility.

Potential Liquidity Concerns or Strengths

Despite the current liquidity position, concerns arise from the increased cash outflows in operations and investing activities. With approximately $71.9 million in cash and cash equivalents at the end of Q3 2024, the company faces challenges to maintain liquidity amid ongoing acquisition strategies and inventory management. However, the available credit under the 2022 Revolving Credit Facility, reported at $486.6 million, provides a buffer against short-term liquidity pressures.

Is Compass Diversified (CODI) Overvalued or Undervalued?

Valuation Analysis

As of September 30, 2024, the following valuation ratios are relevant for assessing financial health:

• Price-to-Earnings (P/E) Ratio: 16.2
• Price-to-Book (P/B) Ratio: 1.05
• Enterprise Value-to-EBITDA (EV/EBITDA) Ratio: 8.4

Over the past 12 months, the stock price has experienced the following trends:

The company's dividend yield and payout ratios are as follows:

• Dividend Yield: 3.2%
• Payout Ratio: 60%

Analyst consensus on stock valuation indicates the following:

• Buy: 5 Analysts
• Hold: 3 Analysts
• Sell: 1 Analyst

The financial metrics presented above provide a comprehensive view of the valuation landscape for the company as of 2024, allowing investors to make informed decisions based on current market conditions.

Key Risks Facing Compass Diversified (CODI)

Key Risks Facing Compass Diversified

Compass Diversified faces a range of internal and external risks that could impact its financial health significantly. These risks include industry competition, regulatory changes, and fluctuating market conditions.

Industry Competition

The competitive landscape in which Compass Diversified operates is characterized by numerous players. In the three months ended September 30, 2024, the company reported net revenues of $582.6 million, up from $521.1 million in the same period in 2023, reflecting an increase of approximately 11.8% . However, increased competition may pressure pricing and market share, particularly as consumer preferences evolve.

Regulatory Changes

Changes in regulations can pose significant risks. Compliance with environmental laws and product safety standards is mandatory, and any new regulations could increase operational costs. The company has seen selling, general, and administrative expenses rise to $158.8 million, up from $132.9 million in the previous year . Such increases may result from compliance-related expenditures.

Market Conditions

Market conditions, including economic downturns or shifts in consumer spending patterns, can adversely affect sales. For the nine months ended September 30, 2024, net sales were $1.65 billion, compared to $1.49 billion in the same period in 2023, illustrating growth despite market challenges . However, inflationary pressures have led to changes in consumer discretionary buying behaviors, impacting sales across various segments.

Operational Risks

Operational risks include supply chain disruptions and reliance on key suppliers. The company reported an increase in cost of revenues to $308.0 million from $295.8 million year-over-year . Disruptions in the supply chain could lead to increased costs and inventory shortages, affecting profitability.

Financial Risks

Financial risks encompass liquidity and interest rate fluctuations. The company’s interest expense for the three months ended September 30, 2024, was $27.4 million, slightly down from $27.6 million in the previous year . As borrowing costs rise, maintaining liquidity while managing debt levels becomes crucial.

Strategic Risks

Strategic risks involve the potential failure to execute business plans effectively. The company has made significant acquisitions, including The Honey Pot Co., which contributed $31.5 million in net revenues in the third quarter of 2024 . However, integration challenges and market performance of newly acquired businesses could pose risks to overall strategy execution.

Mitigation Strategies

To address these risks, Compass Diversified has implemented various strategies. The company has diversified its product offerings and market presence to reduce reliance on any single segment. Additionally, ongoing investments in technology and operational efficiencies aim to streamline processes and reduce costs. The management continues to monitor regulatory developments and adjust compliance strategies accordingly.

Future Growth Prospects for Compass Diversified (CODI)

Future Growth Prospects for Compass Diversified

Compass Diversified is well-positioned for future growth driven by several key factors:

Key Growth Drivers

• Product Innovations: The company is focusing on enhancing its product offerings. For instance, the net sales from BOA increased by $8.3 million or 22.3% for the three months ended September 30, 2024, compared to the same period in 2023.
• Market Expansions: There has been significant growth in international sales, which rose by $8.5 million due to strong demand.
• Acquisitions: The acquisition of The Honey Pot Co. in January 2024 contributed $75.9 million in net revenues post-acquisition.

Future Revenue Growth Projections

Revenue projections for 2024 indicate a consolidated net revenue increase of approximately $157.6 million, or 10.6%, compared to the corresponding period in 2023.

Earnings Estimates

Segment operating income for the nine months ended September 30, 2024, was $33.8 million, reflecting an increase of $2.2 million from the previous year.

Strategic Initiatives and Partnerships

The company is actively pursuing strategic partnerships and initiatives to bolster its market presence. This includes expanding retail locations, with new salons opened in London and Connecticut.

Competitive Advantages

Compass Diversified benefits from a diversified business model across various segments. For example, net sales for the nine months ended September 30, 2024, were approximately $387.4 million, a slight increase from $385.7 million in 2023.

Article updated on 8 Nov 2024

Resources:

• Compass Diversified (CODI) Financial Statements – Access the full quarterly financial statements for Q3 2024 to get an in-depth view of Compass Diversified (CODI)' financial performance, including balance sheets, income statements, and cash flow statements.
• SEC Filings – View Compass Diversified (CODI)' latest filings with the U.S. Securities and Exchange Commission (SEC) for regulatory reports, annual and quarterly filings, and other essential disclosures.