I've owned it before as many other BDC's. I've escaped most of the carnage but I am trying to be very careful and that is why I appreciate our discussion. I spoke to a founder officer of another BDC earlier this week. He did not like PSEC because it was all in one market segment. I spoke to PSEC several years ago because there was some stigma around the guy running it. There was a lawsuit that I don't think went anywhere but it made me leary. It is hard to argue with the insider buying. Did you see how NGPC has been crushed?
Another poster brought up PSEC. That has much more favorable "math" than CODI. First off they are in the same business. They lend and take equity in micro-caps. They are at $9.5 per share. They will "CAD" $1.40 They will pay out $1.60. (like CODI, overpaying CAD for the time being). They just raised 250 million at Libor plus 4 points without an equity dilution. The debt offering was oversold. Their market cap is under 500 million (like CODI).
Good points.I can't disagree but my only other points would be: For a financially healthy company like CODI that has liitle risk at this point of having any serious financial problems, what would an invesor pay for a yield in this situation. If I take the .75-1.00 (until further notice mid point of .875) it is a CAD return of 11% currently. Maybe that is fair value. At $5 it is 17.5%. Everyone has to decide what yield is attractive to them that has the potential to grow unlike a bond. If CODI can acquire 1 or 2 businesses in the next 12 months then the CAD could be positively impacted. I think this is highly likely since they have cash which many other people do not.
Here is the deal. Lets assume CODI can cash flow $1.00 in 2010. That means it is trading at 8 times cash flow. CODI only PAYS 4-5 times cash flow when it buys companies. When they put them all together, and add a management fee, they are only WORTH 4-5 times cash flow just like what the individual companies trade for. Thus, CODI is WORTH $4 or $5 per share. However, Mr. market is assuming CODI can get back to $1.3 in cash flow in 2011-2013 and it is attaching a premium 6x multiple to it, giving it the $7.8 share price. Most professionals are buying stocks based on a recovery (2011-2013) earnings or other identifying multiples.I am a long term buyer (5-15 years) I have lots of CODI because I like the model. Look for a reduced pay out of $1.00 in 2011 (80% of CAD of $1.30), a price of 8-10 over the next 2-3 years. Then, in 2013-2015 a move to 11-15 with a solid resumption of $1.3-$1.70 in dividend.
That's a good analysis but where are you getting the $1.00 per share in cash flows? Looks to me they can generate a significantly higher number. 1st quarter cash from operations was like $25MM so annualize that and seems like they could do $100MM before any big adjustments such as for sales of businesses. Can you help us reconcile the $25MM 1st quarter to only having $37MM annually?
Part of the issue seems they subtract the gains on sale of business from operating cash flow while some might argue a business that is in the busienss of buying and selling businesses that is a legitimate part of operating cash flows. Unless cash flow is really seasonal, judging by last quarter cash flow report it looks way below fair value.
According to your thesis they get no value for their past sales or potential future sales of higher than 4-5 times cash flow. In additon, if you believe they will earn CAD of $1 in '09 which should be considered a very very difficult environment, that 12.7% return seems pretty attractive in todays low rate world. It seems like there is much more upside potential than downside potential. If CAD was $1.70 in an upbeat economy and the stock sold for $20 then I would see how that 8.5% might not be considered a bargain.