Jefferies cuts Compass Diversified stock rating amid Lugano probe

On Friday, Jefferies analysts downgraded Compass Diversified stock (NYSE: CODI) from Buy to Hold, adding pressure to a stock that has already declined over 68% in the past six months. The decision comes amid ongoing uncertainty surrounding an investigation at the company’s Lugano subsidiary. According to InvestingPro data, CODI maintains a strong current ratio of 4.07, indicating solid short-term liquidity despite recent challenges. The analysts also adjusted the price target for Compass Diversified stock to $7.30 from the previous $28.00.

The investigation centers on Lugano’s former CEO, who is alleged to have engaged in unauthorized third-party funding arrangements and questionable inventory valuations. These actions have led to a significant overstatement of inventory, prompting the downgrade.

Jefferies analysts noted that their new price target is based on a sum-of-the-parts (SOTP) analysis. They have conservatively assigned zero value to Lugano, aligning with management’s recommendations due to the material overstatement of inventory and the expected lengthy recovery process.

Compass Diversified has been facing challenges following the disclosure of the investigation, impacting its stock rating and price target. The company has yet to provide further updates on the investigation’s progress.

In other recent news, Compass Diversified has reported significant steps to manage liquidity and reduce costs following the discovery of financial irregularities at its subsidiary, Lugano Holding, Inc. The company has entered into a forbearance agreement with its lenders, cut management fees, and suspended quarterly distributions to shareholders. Additionally, Compass Diversified has restricted further investments in Lugano and is focusing on its other subsidiaries, which are perceived to be in a strong position for growth. Compass Diversified received a notice from the New York Stock Exchange for failing to file its first quarter Form 10-Q on time and has six months to regain compliance. In light of these developments, S&P Global Ratings downgraded Compass Diversified to ’B-’ and placed the ratings on CreditWatch with negative implications. The company’s liquidity score was revised to ’less than adequate’, and its management and governance score was downgraded to ’negative’. An internal investigation into Lugano’s accounting practices is ongoing, leading to the resignation of Lugano’s founder and CEO, Moti Ferder, with Josh Gaynor stepping in as interim CEO. Compass Diversified is working to address these challenges and file restated financial statements for the fiscal year ending December 31, 2024.

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