2023-06-23 14:15:01 ET
Summary
- Compass Diversified shares are undervalued due to a low in its earnings cycle and expected solid EPS growth in the coming quarters.
- CODI's price-to-book ratio is near its long-term average, but steadier profits lead to an attractive P/E, warranting a valuation premium.
- The stock chart exhibits a golden cross, but there is a high amount of volume by price up to the $24 level, making it tough for bulls technically.
Financials are down on the year . Amid a dearth of dealmaking and rising rates applying pressure on bank funding costs, the value trade has been out of favor after a strong 2022. And just recently, the Treasury yield curve has fallen more deeply inverted - another worrisome sign. But has enough bad news been priced in? And are there winners in the funding space that bulls can spot?
I see shares of Compass Diversified ( CODI ) as undervalued given a low in its earnings cycle likely occurring now and solid EPS advancement in the coming quarters. The chart, however, is nothing to write home about from the bullish perspective.
Financials Lagging in 2023
According to Bank of America Global Research, CODI is a private equity firm specializing in add-on acquisitions, buyouts, industry consolidation, recapitalization, late-stage, and middle-market investments. Compass' business model is to acquire companies at attractive price multiples, steer them through a transition period of performance improvement, then opportunistically monetize the investments and recycle the capital into new opportunities. Compass currently owns six branded consumer businesses (Marucci, Ergobaby, Lugano, Velocity Outdoor, BOA, and 5.11) and four niche industrial businesses (Advanced Circuits, Arnold Magnetic, Sterno, and Foam Fabricators).
The Connecticut-based $1.5 billion market cap Diversified Financial Services industry company within the Financials sector has negative trailing 12-month GAAP earnings and pays a high 4.8% dividend yield, according to The Wall Street Journal.
Compass reported strong Q1 earnings back in May. While the GAAP EPS figure of -$0.06 missed the consensus estimate, it did beat on the topline while first quarter adjusted earnings were $0.46 per share thanks to strong results out of its consumer segment. BofA reports that its industrial arm was also robust despite some inventory issues and inflation pressures among its owned businesses.
What was particularly encouraging was that the management team raised its adjusted EPS outlook. Finally, during the quarter, the company bought back 210,000 shares, leaving $45 million of room in its current share repurchase program. With ample liquidity and a quality portfolio of brands, there are still risks for investors to consider. Of course, a macro slowdown would hurt the private equity firm while significant deterioration among its biggest holdings would be problematic.
On valuation , analysts at BofA see earnings troughing this year before rising toward $2 in the coming quarters. Per-share profits are then expected to top the $2 mark by 2025. The Bloomberg consensus forecast is close to BofA's projection. Dividends, meanwhile, are seen as holding at the $1 figure amid ongoing economic and private-market uncertainty. But with a forward P/E near 11 right now (at trough earnings), shares still appear cheap on this profitable firm.
CODI: Earnings, Valuation, Dividend Yield Forecasts
BofA Global Research
CODI's price-to-book ratio is near its long-term average, but much steadier profits today lead to an attractive P/E. If we apply a below-market 12 multiple on $1.90 of forward earnings, then the stock is undervalued by about 10%. I assert a valuation premium to the industry is warranted given its robust EPS outlook.
CODI: Undervalued Given The Expected EPS Improvement
Seeking Alpha
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Thursday, August 3, 2023, AMC. The company's buyback program is slated to end on December 31, so be on the lookout for news regarding any new share repurchase plans.
Corporate Event Risk Calendar
The Technical Take
CODI has endured volatility since I began coverage of the name last November. Still, the stock is higher in that time, and an emerging technical formation should be monitored. Notice in the chart below that shares are consolidating in a symmetrical triangle. After testing the uptrend resistance line, CODI has modestly pulled back in recent days.
I see current support around $19. What's bullish is that the stock chart exhibits a golden cross - a situation in which the shorter-term 50-day moving average has crossed above the longer-term 200-day moving average. While that is encouraging, there is a high amount of volume by price up to the $24 level, so that will make things tough on the bulls. For now, $23 is resistance. Overall, the chart is simply in a neutral consolidation mode.
CODI: Shares In Consolidation Mode, But Bullish Golden Cross
The Bottom Line
I reiterate my buy rating on Compass. Its valuation is decent considering the earnings growth trajectory, though the chart and its momentum are not all that strong at the moment.
For further details see:
Compass Diversified: Near Trough Earnings, Attractive Valuation When Looking Ahead