Compass Diversified Promises Faster Growth to Investors

Compass resembles a publicly traded private-equity fund, with a collection of 10 niche businesses in a variety of consumer and industrial markets. Its subsidiaries include 5.11 Tactical, Sterno, Primaloft, Ergobaby, and Velocity Outdoor.

With a $1.6 billion-market value, Compass buys, holds, and sells businesses, taking advantage of the parent company’s balance sheet and lower cost of capital to invest in their growth—while paying a quarterly dividend out of its subsidiaries’ cash flows. 

The group is on track to report adjusted earnings before interest, taxes, depreciation, and amortization, or Ebitda, of more than $444 million for 2023, according to management guidance on Wednesday. Compass’ guidance for 2024 calls for a roughly 13% increase to around $500 million in adjusted Ebitda, on the way to a stated target of $1 billion in 2028. 

It’s a faster growth profile than Compass has had for most of its nearly 18-year history as a public company, an intentional shift from slower-growth, lower-valuation multiple companies to potentially pricier but faster-growing subsidiaries. From 2014 to 2018, Compass’ adjusted Ebitda grew at an average of 4.7% annually, then accelerated to an average of 14% from 2019 to 2023.

CEO Elias Sabo says that the ideal target company for Compass today can grow earnings at a high-single digit to low double-digit rate annually.

The event on Wednesday was hosted at the headquarters of Compass’ Lugano Diamonds subsidiary in Newport Beach, Calif. Lugano isn’t exactly a household name: The average sales price of its rings, bracelets, necklaces, and other diamond-studded jewelry is around $309,000. Its customers tend to be people with multiple luxury homes, who fly private and appreciate the finer things. Lugano is vertically integrated from the design and manufacturing of its jewelry, to direct sales to customers out of its salons located in exclusive zip codes including Aspen, Colo.; Palm Beach, Fla.; and Greenwich, Conn.

Management held up Lugano as an example of Compass’ strategy on Wednesday. The company has shown it can grow fast at high profit margins. Sales have increased at a compound annual growth rate of 57% since Compass acquired Lugano in 2021. Its 2023 Ebitda margin was 36%.

But it takes upfront investment to generate that growth—inventory consists of diamonds and precious stones costing hundreds of thousands or even millions of dollars. Compass can provide needed capital at a lower cost than Lugano could secure on its own. 

“It’s a win-win because by owning all of its inventory, [Lugano] can both deliver stronger margins and great value to customers, plus a high return on invested capital,” Sabo says.

On Tuesday, Compass announced a deal to acquire 85% of The Honey Pot Co, a feminine care brand focused on plant-derived and natural hygiene and personal care products, for $347 million in cash. It’s another fast-growing consumer goods company with the potential to benefit from Compass’ cash, largely for a marketing push to raise brand awareness. The Honey Pot has a 4.5% share of a $17 billion U.S. market, the company says. 

While Compass is happy to hold companies in its portfolio and let them grow, everything is for sale for the right price, Sabo says. In November, the company announced the $572 million sale of its Marucci Sports subsidiary, a maker of baseball bats and other equipment, to Fox Factory Factory Holding. Compass acquired Marucci in 2020 for $200 million and put another $70 million or so into the subsidiary via bolt-on acquisitions.

Sabo is bullish on the potential for more consumer-focused acquisitions in 2024, with deals relatively attractive in the sector. Compass also has ambitions to add healthcare exposure to its portfolio, hiring a partner focused on the industry last year. So far, valuations haven’t been favorable enough for Compass to do a healthcare deal, Sabo says.

Compass’s net debt will be approximately 3.7 times annual adjusted Ebitda after the Honey Pot deal closes in February, above the high end of management’s leverage target. But Sabo says the company is comfortable operating there given its faster expected growth.

Compass shares have returned 6.2% over the past year, including dividends, versus a 3.9% return from the
Russell 2000
and 21% from the
S&P 500.
The stock currently sports a dividend yield of 4.7%.

Write to Nicholas Jasinski at [email protected]