Jefferies cuts Compass Diversified stock rating amid Lugano probe

On Monday, Jefferies analysts downgraded Compass Diversified stock from Buy to Hold. The decision comes in light of significant uncertainties arising from an ongoing investigation at the company’s Lugano subsidiary. The downgrade follows a challenging period for the stock, which has declined nearly 69% over the past six months, despite maintaining its 20-year track record of consistent dividend payments.

The investigation revealed that Lugano’s former CEO was involved in unauthorized third-party funding arrangements and questionable inventory valuations. This situation has led Jefferies to reassess the value of Compass Diversified’s assets. According to InvestingPro data, the company maintains strong liquidity with a current ratio of 4.07, though it’s currently burning through cash reserves.

Jefferies set a new price target for Compass Diversified stock at $7.30, down from the previous target of $28.00. The revised target reflects a sum-of-the-parts valuation, assigning zero value to Lugano due to the overstatement of inventory and anticipated lengthy recovery process.

Management at Compass Diversified has recommended this conservative valuation approach, acknowledging the material overstatement of inventory at Lugano. The investigation and its implications remain a focal point for investors and analysts alike.

In other recent news, Compass Diversified has been navigating significant challenges stemming from its subsidiary, Lugano Holding Inc. The company faces ongoing accounting irregularities at Lugano, leading to a delay in filing its Q1 2025 Form 10-Q and necessitating a restatement of its fiscal 2024 financial statements. S&P Global Ratings has downgraded Compass Diversified to ’B-’ and placed it on CreditWatch with negative implications, citing unreliable financial statements due to these issues. Additionally, Jefferies analysts downgraded Compass Diversified from Buy to Hold, adjusting the price target from $28.00 to $7.30, as the Lugano investigation revealed unauthorized third-party funding and questionable inventory valuations.

In response to these developments, Compass Diversified has taken steps to manage liquidity and reduce costs, including entering a forbearance agreement with lenders and suspending quarterly distributions. The company has also restricted further investment in Lugano while focusing on its other subsidiaries. Compass Diversified received a notice from the New York Stock Exchange for failing to file its first-quarter report on time, with a six-month deadline to regain compliance. The company’s leadership remains focused on remediation efforts and has appointed Josh Gaynor as interim CEO of Lugano following the resignation of its founder, Moti Ferder.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.