Compass Diversified Holding (CODI) has been a holding of The ABV Fund for close to three years now. The stock has performed very well over this time. However, just because it has done well for us for the last three years does not mean it will do well for us in the future. Thus the question arises – Does it make sense to own this security at today’s prices?
I wrote an article on Seeking Alpha providing a quick analysis of the stock here. A quick summary:
CODI is essentially a public middle-market private equity fund ….. that pays a quarterly distribution of $0.36/share (that’s a yield of 10% at current prices)…. For 2011, the company’s EBITDA would compare to $138.5m. Its enterprise value is $950m. Thus the company trades at an EV / EBITDA of 6.8x.
The company has some governance risk as the manager exercises considerable control over operations and is well paid.
A valuation of <7x EBITDA does not strike me as excessive for a company that has been well managed and paid out over 55% of cash flows generated (including gains from sales) over the last six years. In fact, in the current interest rate environment, I would argue that a company paying a relatively safe 10% yield should trade at a higher multiple.
The full article contains more details and is worth reading for those not familiar with the company.
A missed opportunity?
First a confession – I often go weeks without checking the price of some of my holdings. As I wrote this piece, I stumbled across a chart and was surprised that I didn’t recall CODI trading at $18+. I have news alerts set-up to notify me if some news breaks and I may scan the daily percentage change on my yahoo / google finance homepage to make sure there hasn’t been a huge price change. But if the price just slowly creeps along I may miss out. Now most businesses I invest in just don’t change that much day to day so this works out fine. But as a value investor I should remember to treat Mr. Market the same when selling as when I am buying. If the price offered is higher than my estimate of intrinsic value, I should sell. This is something I will have to work on.
Back to CODI – In January 2011 CODI was trading above $18.50/share. At around this time (July) last year the company was trading at over $17/share. That’s a considerable premium to current prices. So did I miss an opportunity to sell shares at a good valuation?
At those prices, the enterprise value would have been $1,166m (January 2011) and $1,096m (July 2011). The EV/EBITDA ratio at those prices (with the assumption that EBITDA levels were the same) would be 8.5x and 8.0x. The EBITDA was actually a little lower then so the ratio may be a bit higher. Not a bad valuation, certainly better than the current valuation of <7x, but not really outrageous. This analysis also doesn’t account for dividends. Adjusting for dividends received since then, the prices on those dates would be $15 – $16. At those prices, it was certainly below my estimate of intrinsic value. Which is all a long roundabout way of saying, that no I didn’t miss an opportunity but that was because of luck. I should certainly pay more attention to price levels on a day-to-day basis.