Company Notes Series (#9): CompoSecure

Editor’s note: This is the latest edition in the “Company Notes Series”, where we periodically share our notes on companies we’ve studied in the recent past but currently have no vested interest in (we may invest in or sell shares in the companies mentioned at any time). The notes are raw and not updated, and the “as of” date for the data is given at the start of the notes. The first eight editions in the series can be found here, here, here, here, here, here, here, and here. Please share your thoughts on the series through the “Contact Us” page; your feedback will determine if we continue with it. Thanks in advance!

Start of notes for CompoSecure

Data as of 25 September 2024

Details of CompoSecure

  • Ticker: CMPO
  • Exchange: NASDAQ
  • HQ: New Jersey
  • Founding year: 2000
  • Date of IPO: December 2021, via a SPAC-merger with Roman DBDR Tech Acquisition Corp

Business of CompoSecure

  • CompoSecure led the creation and growth of the metal card form factor through its expertise in material science and has been at the forefront of emerging embedded payment card technology.
  • CompoSecure is a category leader in the design and manufacture of premium metal payment cards. Its metal payment cards are currently issued typically on the Visa, Mastercard, American Express, and China Union Pay payment networks.
  • In 2003, for the American Express Centurion program, CompoSecure created the world’s first metal payment card. In 2009, CompoSecure developed the first commercialized metal payment cards with embedded EMV chips (EMV is an acronym derived from the names Europay, Mastercard, and Visa, and is a high-security payment protocol for payment cards which utilizes an embedded microprocessor that, when paired with an EMV enabled payment terminal, authenticates cardholder transactions; EMV cards are often called “chip cards”). In 2010, for the JP Morgan Chase Sapphire Preferred program, CompoSecure created the first metal payment card targeting the mass affluent segment. In 2017, CompoSecure introduced the first large-scale NFC-integrated dual-interface metal payment cards for the American Express Platinum program; NFC refers to the near-field communications protocol which enables RFID (radio-frequency identification) communications between payment cards and payment terminals.
  • Dual-interface payment cards comprise the majority of CompoSecure’s sales volume today.
  • CompoSecure has many form factors for metal payment cards and the primary ones are shown in Figure 1.
  • In 2022, CompoSecure also began offering its customers the opportunity to include innovative features in their payment cards:
    • Biometrics – Fingerprint sensors for added security
    • Dynamic CVV – Converts the CVV code from a static number printed on the back of a card to one on a tiny e-ink screen that refreshes periodically.
    • LED – LEDs on the face of a CompoSecure Metal Veneer card that lights up when the card is used for transactions; the LEDs can form the issuing bank’s logo or other elements
  • CompoSecure’s customers are global issuers of payment cards. Its largest customers are American Express and JP Morgan Chase. Together these customers represented 70.5% of CompoSecure’s revenue of US$390.6 million in 2023, with American Express representing 28.8% and JP Morgan 41.7%. See Figure 2 for the proprietary and co-branded card programs of JP Morgan Chase and American Express that CompoSecure supports.
  • CompoSecure’s contract with American Express was extended in 2023 and will be up for renewal on 31 July 2026. Under the contract, American Express reserved annual capacity of products and is required to order a certain percentage of that capacity from CompoSecure, and the company may charge American Express for a portion of that capacity even if American Express orders below capacity for any given year. American Express can terminate the contract with written notice. CompoSecure has been working with American Express for nearly 20 years. 
  • CompoSecure’s contract with JP Morgan was extended in 2023 and will be up for renewal on 31 December 2028. Under the contract, JP Morgan Chase agreed to purchase its metal payment cards only from CompoSecure during the contract-term, and reserved annual capacity of products. JP Morgan can terminate the contract with written notice. CompoSecure has been working with JP Morgan for nearly 16 years.
  • CompoSecure’s revenue comes primarily from the sale of its metal cards. In 2023, CompoSecure produced 31 million metal cards, and it served more than 150 card programs. There are recurring elements in CompoSecure’s revenue because the company’s metal cards support its customers’ new customer acquisition and replacement card activity for lost and stolen cards, account fraud, and natural card reissuance cycles. 
  • 82.3% of CompoSecure’s revenue in 2023 came from the USA; the rest was grouped under International.
  • CompoSecure competes with other card manufacturers. But most of the company’s competitors in card manufacturing are large, diversified businesses with areas of strategic focus outside of the payment cards market, and their card operations focus primarily on lower margin plastic cards. CompoSecure’s management also believe that most competitive metal card manufacturers have substantially less production capacity, less technical expertise in the metal form factor, a limited selection of metal card designs and constructions, and less extensive supplier relationships for the raw materials needed for metal cards. CompoSecure’s metal-card competitors include Idemia France S.A.S., Thales DIS France SA, CPI Card Group, Giesecke & Devrient GmbH, Federal Card Systems, Kona I, BioSmart Co., Ltd., and ICK International.
  • CompoSecure designs and manufactures its metal payment cards. It has 5 facilities that total 241,000 square feet, and all are in Somerset, New Jersey.
  • In the third quarter of 2021, CompoSecure entered the cryptocurrency market through the launch of the Arculus Platform, a three-factor security platform with broad industry applicability. The Platform makes it safe, simple and secure for an individual to buy, swap and store cryptocurrencies. CompoSecure started with offering the Arculus Cold Storage Wallet to businesses and consumers. The Arculus Cold Storage Wallet allows users to easily and securely buy and swap cryptocurrencies and store their private keys, providing the convenience of a hot storage wallet with the security of cold storage. Hot storage wallets generate and store private and public keys and digitally sign transactions within Internet-connected devices where storage of the keys is hosted by a third party. Cryptocurrency exchanges typically provide their customers hot storage wallets with the exchange having custody of the user’s private keys. Cold storage wallets store private keys and sign transactions in an offline device, with the private key in the custody of the user, thus protecting the wallet from network-based security vulnerabilities; cold storage wallets are thus less prone to risk of cyber-theft than hot storage wallets. Today, CompoSecure has expanded the Arculus platform into two areas, Arculus Business Solutions, and Arculus consumer products.
  • Arculus Business Solutions consist of:
    • Payments + Arculus Authenticate: The Arculus Authenticate solutions can be seamlessly integrated and paired with CompoSecure’s payment cards, allowing consumers to make secure transactions and gain secure access to personal accounts, all from the same metal card. This custom security solution enables card issuers and other businesses to build multi-factor authentication solutions for their customers, through the convenience of the Company’s premium metal cards
    • White-Labeled Cold Storage: CompoSecure provides white-labeled cold storage wallets in the form of a premium metal cards, to give consumers the ability to make transactions and store the private keys to their digital assets in the same metal cards
    • Payments + Arculus Cold Storage: CompoSecure provides the combination of Arculus Cold Storage combined in premium metal payment cards to give consumers the ability to make transactions and store the private keys to their digital assets in the same metal cards
    • Payments + Arculus Authenticate + Arculus Cold Storage 
  • Arculus consumer products consist of the Arculus Cold Storage Wallet
Figure 1
Figure 2

Market opportunity of CompoSecure

  • CompoSecure’s sales volume of payment cards in 2023 is less than 0.7% of the estimated addressable market for payment cards. Worth noting that CompoSecure’s market share was around 0.5% in 2021.
  • In 2023, CompoSecure produced metal payment cards for 8 of the top 10 U.S. card issuers. Management believes there are substantial opportunities to expand adoption of metal cards for existing customers’ proprietary and co-branded mass affluent card programs in the U.S. which do not currently offer metal payment cards. The number of issuers adopting metal programs continues to increase, and there has been an increase in card issuers expanding their metal card programs to additional proprietary and co-branded portfolios.
  • Management believes that issuers in international markets are still in the early stages of adoption of metal cards and largely untapped opportunities exist across major markets in Europe, Asia, India, the Middle East, and Latin America. In these regions, issuers are developing awareness of the relatively low cost and attractive economics of metal payment card programs.
  • Digital banks and other fintechs are increasingly seeking premium physical touch points to enhance their typically digital-only customer relationships, which mean they are more likely to offer premium metal cards to their customers. 
  • CompoSecure’s metal cards use 65% post-consumer recycled stainless steel and this is a major sustainability advantage over plastic cards.

Management of CompoSecure

  • On 7 August 2024, David Cote announced that his family office will invest US$372 million to buy 60% of CompoSecure’s shares (49.3 million) from existing CompoSecure shareholders and thus become a majority shareholder. The investment equated to a price of US$7.55 per share and it was completed on 17 September 2024. As part of the investment, David Cote became executive chairman of CompoSecure’s board, while CompoSecure’s management team – including CEO Jon Wilk – continued in their current roles. Wilk has been CEO since May 2017.
  • Prior to Cote’s involvement, CompoSecure had Class A and Class B shares, where Class B shareholders could receive certain tax benefits; the entire set-up was very complicated. Cote’s investment cleaned up the capital structure as the sellers of CompoSecure’s shares converted all of their Class B shares into Class A shares, and sold the Class A shares to Cote. CompoSecure now has only one single class of common stock.
  • Cote has a legendary track record of improving companies’ efficiency and margins.
  • Cote first built his reputation with Honeywell, where he was CEO from 2002-2017. 2003 was the first full-year Cote was CEO of Honeywell. Table 1 below shows Honeywell’s revenue, operating profit, and net profit from 2003 to 2017. Notice the strong growth in operating profit and net profit (2017’s net profit was hurt by very high taxes because of the US tax reform). Cote became executive chairman of Vertiv Holdings in February 2020 and is still executive chairman today; Vertiv’s operating margins have increased from 7.7% in 2020 to 15.1% in the last 12 months.
  • In talking about his investment in CompoSecure, Cote said:

“We are excited to begin working with Jon Wilk and the team at CompoSecure to continue driving long-term value for shareholders. We plan to focus our efforts on enhancing the Company’s organic growth and operational efficiency while evaluating ways to further diversify its customer base and business mix through M&A. The Company’s permanent capital base eliminates the duration and transactional constraints of traditional alternative asset structures and can allow it to become the acquiror of choice for companies in need of operational improvement and M&A expertise.”

  • The prior major shareholders of CompoSecure were Mitchell Hollin and Michele Logan. Mitchell Hollin is a leader of LLR Partners, a private equity firm, while Michele Logan is a co-founder of CompoSecure. They were the ones who sold their shares to David Cote.
Table 1

Financials and valuation (numbers as of 2024-09-25) of CompoSecure

  • For 2019-2023, CompoSecure’s revenue CAGR is 12.6%, helped by a big jump of 41.3% in 2022; 2023’s revenue growth is 3.2%
  • For 2019-2023, CompoSecure generated consistent profit and free cash flow.
  • Note that CompoSecure’s net profit in Table 2 includes the portions that accrue to the Class B shareholders; after David Cote’s investment, there is only one single share class as mentioned earlier.
  • As of 30 June 2024, CompoSecure had:
    • 81.7 million Class A and Class B shares, so after David Cote’s investment, we can take the total number of Class A shares to be 81.7 million.
    • A total of 8.4 million restricted stock units, performance stock units, and earnout shares that have yet to be vested.
    • 22.415 million public warrants outstanding; the warrants expire on 27 December 2026, and each public warrant entitles the registered holder to purchase one share of the company’s Class A common stock at a price of $11.50 per share.
    • US$130 million in exchangeable notes that can be exchangeable into Class A common stock at a conversion price of US$10.98 per share, which works out to 11.8 million shares. But CompoSecure has the intention to redeem the exchangeable notes and it’s at the discretion of the company to make the redemption, instead of letting the notes convert. 
    • A total diluted share count of 112.52 million, taking into account: the 81.7 million Class A shares; the 8.4 million RSUs, PSUs, and earnout shares; and the 22.415 million public warrants outstanding
  • CompoSecure’s trailing EPS and FCF per share are US$1.06 and US$0.96 respectively, using the 112.52 million total diluted share count. CompoSecure’s stock price of US$13.75 gives it a PE and PFCF ratio of 12.9 and 14.3. Worth noting that David Cote’s investment (as a result of the simplification of the tax structure) is expected to deliver an additional annual US$20 million in free cash flow. 
  • Is a PE and PFCF ratio of 12.9 and 14.3 too low for a company with an effective monopoly in metal payment cards, and with a new major shareholder on board who has a long history of excellent execution at industrial companies?
Table 2
Table 3

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