CompoSecure：重金属——[Business Breakdowns，EP.232]

This is Matt Reustle, and today we are breaking down CompoSecure. If you have a premium metal credit card in your pocket, CompoSecure likely manufactured it. My guest for this episode is Parsa Kiai, founder and CIO of Steamboat Capital. In the spirit of integrity and full disclosure, this is my first time breaking down a company where I actually own the stock. While we get into the risks in this discussion, and you’ll hear the disclaimers, to be very clear, this is not investment advice.

I was first introduced to Parsa by Andrew Peters of Revelare Partners. I saw Andrew posting some notes from an investor about Compo, and I was curious to hear more. What really made him the ideal guest is that he has history with CompoSecure before the Dave Cote era, which started sometime in 2024. We get into all of this: the niche market of premium metal credit cards, how CompoSecure has such a dominant position in that industry, whether there’s an opportunity in digital storage, and, perhaps most importantly, what Dave Cote’s involvement, the M&A track record that he brings, and the unique corporate structure they’ve created all mean for CompoSecure.

Parsa, I am excited to have you here to talk about CompoSecure. You were a very specific guest that I was interested in talking to about this name, and we’ll get to that. I don’t think it’s in any way a well-known name, although it’s been coming onto the radar. Starting us off with a simple introduction to the underlying company and what they do will be the perfect place to start, and then we can get rolling from there.

1. CompoSecure Owns Premium Metal Cards

CompoSecure is interesting in the sense that it’s certainly not a household name, but I would say probably almost all of your listeners have it in their wallet. It is a fascinating little company that manufactures the premium heavy-metal credit cards that most of us have in our wallets. So, if you look at the back of your American Express or Chase Sapphire card and you look in the bottom-right corner underneath the little NFC wave logo, you’ll see a serial number, and in between it are the letters “CS” for CompoSecure.

It’s a very niche business, but in a very interesting industry and market, where they manufacture, design, and distribute these cards for most of the large premium credit card companies that we think about: American Express Black, Platinum, and Gold; Chase Sapphire; Capital One Venture; and a lot of these new fintech cards, like the Coinbase card, the Robinhood Gold card, or even crypto cards. It’s a very fascinating and really interesting history that goes beyond just the breakdown of the business and the journey along the way, from humble family origins to a SPAC becoming a broken IPO, and then all the way along with its evolution.

I still have one of those old plastic credit cards, a Capital One, that sits in my wallet and has to come out every now and then. It drives me nuts. The rest of my cards, which I prefer to use, are those premium metal cards. They happen to be CompoSecure cards.

It is this interesting niche business. The reason I wanted to have you on was because it came onto my radar after Dave Cote was involved in the business sometime in 2024, sometime last year, and that added a unique dynamic. You have some experience with this business well before that. Maybe we could just start with Cote and what he represents to the story and how it’s changed, and we’ll get into the backstory of the business after that. I do think it’s important to bring him into the conversation quite early.

2. Dave Cote Creates CompoSecure 2.0

He’s probably the main figure in the story right now. You’re right, it was August 2024 that he came in. It was a watershed moment for the company. He became the controlling shareholder by buying out the private equity sponsors and the co-founder, a woman named Michelle Logan. For many of your listeners, Dave Cote needs no introduction.

He, along with another industrial CEO who’s been talked about on your podcast a lot, Brad Jacobs, are probably the 2 best-known industrial CEO entrepreneurs that we have in our market right now, and their track records are both incredible. Dave Cote was the star CEO of Honeywell for many years and then became the chairman of Vertiv and led the growth in that company.

He’s written 2 books on the operating system. It was the Honeywell operating system at first. It is a focus on operational excellence, a focus on capital allocation, and a large part of that is exceptionally astute M&A, which comes from deal origination, integration, and paying the right price for the right business. His involvement is critical, and we honestly look at our investment in the company in 2 parts.

There’s CompoSecure 1.0, which was before Mr. Cote’s involvement, when it was a broken IPO with a hidden gem of a business that was trading at a fraction of its core value. And then CompoSecure 2.0, which is a more respected business with really attractive near-term tailwinds and much longer-term potential under the CompoSecure operating system.

Let’s get back in time to some of that Compo 1.0 era. It’s not quite the 100-plus-year-old business like we just covered with Amphenol. It has a little bit of a shorter history, though it’s still decades old. Bring us back in time in terms of the origin story and how they got to this position in the marketplace, where they are so prominent.

3. The Family Origin Story

It’s a very fascinating story. It does not have the length of history of some other companies, but it was a family-started business, and there was a gentleman named John Herslow and his daughter, Michelle Logan. They worked for their family’s plastic business that the grandparents had started in the ’50s. Through that business, they eventually founded CompoSecure in 2000.

By happenstance, they worked with American Express in 2003 to introduce the first-ever metal credit card. Up until then, credit cards were always plastic. They worked with American Express to make the first metal credit card. I think there’s a rich history of innovation and growth that we’ll get through. It’s important that American Express today, 22 years later, is still a key partner and customer. I think it shows you a lot about the innovation and organic growth that the company has.

Throughout the years, they really pioneered a lot of what we see in a physical premium credit card today. After working with Amex, they helped Chase launch its first metal card, which was the predecessor to the Chase Sapphire card. It was called Chase Palladium in 2009. Again, Chase today, many years later, is still a premier customer, and you’ve seen that relationship grow.

Throughout the years, so much of the innovation that we see in a card today was really helped and pioneered by them. They were the first ones to put an EMV chip in a credit card. Your listeners who listen to the Visa and Mastercard podcast will know that EMV stands for Europay, Mastercard, and Visa. It’s the security protocol for payment cards that puts a microprocessor embedded into a chip so that it works with an EMV-enabled payment terminal to authenticate transactions with much higher security.

They were the first ones to do that. They were also the first ones to put large-scale NFC, or near-field communication, integrated dual-interface metal cards. This is really a protocol in a card that allows for radio-frequency identification between the payment card and the terminal. A lot of this innovation was done by them, even up until now, including biometric security, dynamic CVV codes, and a lot of other things.

It’s a really rich history. Along the way, a private equity company called LLR invested in the company. They paid $100 million for a 60% stake in the business. One key aspect was that they brought on board a senior payments executive named Jon Wilk.

Jon Wilk has a deep history in the business, at Bank of America first and then at Chase. Jon was in the room when they were making that first Chase Sapphire card, and he had the vision and experience of being on the issuer side, saying, “What does an issuer need? What do our premium clients want—our cardholders?” Jon has been instrumental in growing the business, strengthening and growing the American Express and Chase relationships, and expanding to all these new customers, like Capital One, the Delta co-branded card, Amazon co-branded cards, and now all these neobanks and fintechs. That business was growing.

When COVID came around, everything payments-related went crazy, and I believe they were trying to shop the company in 2020. I think that sale didn’t materialize. The company came public via a SPAC.

They merged with a special purpose acquisition company called Roman DBDR, and it debuted in the market in 2021 at a $1 billion enterprise value. SPACs didn’t have a great reputation at the time. We hit a little bit of a bear market, and it provided an opportunity for our involvement in Compo 1.0. But it’s a really rich history of innovation and growth for an interesting niche little company.

It’s easy for me to look at the metal card and think about the vanity play of the noise it makes when it drops on the table, but there’s obviously a lot of actual innovation going into the chip and what would attract them to the banks on the other side of this. I want to get into that SPAC era now because they had this premium metal card business, but I know they introduced another growth engine, very much a sign of the times, and we’ll see where it goes. But can you talk a little bit about, beyond just the baby being thrown out with the bathwater in terms of SPAC up and SPAC down, what was fueling some of the excitement over Compo? That was another piece of the business that we can introduce now?

4. Arculus Adds Digital Security

The SPAC era was interesting because there were just some unrealistic expectations about everything—digital assets and a lot of other things. But they actually have a business called Arculus, which focuses on 2 things. One is a digital cold wallet for storing, transacting, and trading digital assets. But its larger use case, in my view, is really on the security and authentication side, and it’s here that I think there’s potentially a lot of value. It really shows the next step in the innovation and growth of the company.

When they came public via the SPAC, you had this very good core payments business, and it was almost overlooked as an afterthought because they were like, “All right, we have this business. It’s profitable and it’s growing, but really look at this Arculus business.” The expectations there initially were too high. If you think about what Arculus does from security and authentication, it has a lot of incredible use cases that we have not yet seen monetized. Its services can be combined across payments and authentication. It makes your premium metal card into a security token, into an authentication token, and it can be combined to have a lot of different use cases for different banks, fintechs, and all sorts of payment transactions.

For example, you can use this for passwordless login on a variety of different financial apps or banking apps. You can combine it with your biometric fingerprint or face recognition. You can tap your Arculus-enabled metal card on your phone, and this reduces the need for passwords, reduces fraud risk, and simplifies your access while maintaining a lot of high security. I think it also can be used in certain high-value false declines in online purchases. So if you make a potential transaction that needs verification from your bank, without having to call in or text to confirm, you can tap your Arculus card and it minimizes friction, boosts the approval rate, and cuts down on fraud.

So it’s really a win for the cardholder and the issuer. There are a lot of other use cases, including high-value transactions in gaming, in-store approvals in more unusual locations, call center efficiency, and customer verification. Beyond just saying it’s a crypto cold wallet, it has a lot of applications, and it was a big portion of the excitement around the company.

A couple of years after the SPAC, it almost became a bit of a liability because its revenues had not materialized. It was generating about a $20 million operating loss, and it went from being this shiny toy to a liability. And that was our involvement in the company, saying, “We’ve got this incredible niche core payments business that is growing organically, has a long runway for growth, is valued at a fraction of what it’s worth, and we have this incredible nascent technology that is not yet generating a lot of revenues. But it has incredible use cases, an incredible team, and is the next leg of innovation and growth for this company.”

As a consumer, I’ve heard of your credit card with a Bloomberg B-Unit attached for those who use Bloomberg, and how it can be a one-stop shop to reduce a lot of the friction. But then you can obviously understand, from the opposite side of the equation, whether it’s banks or whoever, who have to deal with all of the costs associated with the challenges of security, and it’s only getting more and more intense. So that’s an interesting one, where the expectations were so high and at times you could see these dislocations, but it will be interesting to see how that evolves.

I wanted to tap into those relationships they have. They seem so core. Can you just talk about what drives that beyond some of what you just mentioned, and what the competitive set looks like in terms of others that might be trying to do the same thing and where CompoSecure really ranks against the rest of the peer group?

5. Issuers Depend on Premium Cards

When you think about the relationships that they have with their issuers, the 2 biggest customers are American Express and Chase. If you’re in the premium metal card business, it’s only natural that those are going to be your 2 biggest clients, given their size and scale in the industry. If you focus on those 2 first, you see how long and valuable that partnership has been. And even though it’s a contractual business, with 1-, 2-, and 3-year contracts, the number of times that those contracts have been renewed and had their tenure increased really speaks to how important that relationship is.

Initially, when we looked at the business, we had some concerns about customer concentration. But the more we learned about how symbiotic this relationship is, we became a lot more comfortable with that. So if you think about what they provide, this is really all about the pursuit of the high-end credit card customer. But research shows that 10% of cardholders are responsible for nearly 50% of all consumer spending.

If you are Chase, American Express, now Citibank, or Capital One, you really want to go after that high-end customer because customers and cardholders with credit cards that have an annual fee greater than $500 spend something like $3,000 per month on their credit cards. Those with cards whose annual fee is below that spend only $1,000. The difference between that $2,000 a month is $24,000 in annual spend, and that is a huge prize for credit card issuers, not only because of the interchange revenue that it brings, but all the ancillary service fees and cross-selling opportunities to this high-end cohort.

These are also a much more loyal customer base with lower churn and, given their higher income stature, they generally don’t carry balances, so you have lower credit loss provisions. And you’re seeing this now with the increase in annual fees and the increase in rewards for the new American Express Platinum cards and the new Chase Sapphire cards. It really is a battle to win the top-of-wallet status. When you open your wallet, you want to be that heavy metal card that you throw on the dinner table at a restaurant and it clanks.

It really is trying to find those customers. What CompoSecure does is it really helps facilitate that because when you think about the unit economics of this business, you can think about it on a per-card basis, and then you can think about it in aggregate. If we take an American Express cardholder or a Chase Sapphire cardholder, these cardholders will spend anywhere between $30,000 and $60,000 per year. On some of that spend, the interchange is as high as 2.5%, so the card issuer can get $750 or $1,500 annually in interchange revenue.

On top of that, they provide these rewards to the customers, so they have to give something like half of the interchange back to these customers, and they’re happy to do that because it makes, retains, and grows these customer relationships. So you spend about $375 or $750 on your rewards costs. These cards typically have very, very low credit losses. And then you add on top your annual fee for this, and you’re looking at something like a $1,200 or $1,600 annual profit.

The cost to the issuers for this CompoSecure card is $12 per card. So you’re looking at something like a 100-times return on your investment. This is really the only physical COGS that an American Express or Chase has. There are a lot of other things that are variable costs. And if that metal card, that premium feel, is that important, we think it’s very important to have that quality card so that you’re not going to switch to go to a new upstart competitor to save $1 per card when you’re making something like $1,000 or $1,500 in annual profit. And now you compare that to your generic plastic card, even the one that has no fee. It costs less than one-tenth of a premium metal card.

It costs $1.25 per card. But given how much less a customer spends, and generally the higher cost for credit provisions and churn, we estimate that the return on investment on a generic plastic card is less than 1/5 of what it is on a premium metal card.

That is why we think this symbiotic relationship exists. Even as the company has become public, and its high gross margins, high EBITDA margins, and average selling price have become public disclosures, you have not seen customer attrition or market share losses. It is such an incredibly valuable tool for issuers to go after those high-end credit cards.

If you look at a business like American Express, American Express does something like $75 billion of annual revenue. The largest component of that, about $40 billion, is interchange fees. Another $18 billion is net interest income, about $10 billion is card fees, and $8 billion is service fees.

On this $75 billion, American Express makes about $20 billion of pre-tax, pre-provision profits. The biggest cost structure is about $18 billion to $19 billion in card member rewards. This $20 billion of pre-tax, pre-provision profit is really facilitated by providing that valuable customer experience with a $10 card. That cost of goods sold is 0.2% of their cost base.

We think this is a really interesting business: you provide such an experience to such a big company, facilitating such a large scale, and you are such a small part of that cost. That's really why we think these relationships exist and grow, and why other people want to get into the game.

You mentioned that they have this market share. Do you have any sense, in terms of numbers, of what that market share looks like in this segment?

There's about 18 billion payment cards in circulation. Despite all the movement toward mobile wallets, Apple Pay, and everything else, that number is still growing at about 4% per year.

The fascinating thing about cards is that it's actually a rather stable, recurring-revenue business, because most of the new cards issued are actually replacements for card expiration or lost and stolen cards, and these happen with regular frequency. About 4 billion new cards are issued annually. If you look at net new accounts, it's actually a fraction of the cards issued.

There's a solid core of recurring card issuance per year, and then an interesting, nice little amount of new accounts. When you look at the premium metal card business that CompoSecure operates, it's a very, very small share but a very fast-growing share.

Of the 4 billion cards issued annually, less than 1% are premium metal credit cards. But those premium metal cards are growing 3 or 4 times faster than the aggregate cards in circulation.

One thing that we think is really fascinating is that CompoSecure has something like an 80% market share in these premium metal cards. So that market share, that penetration of premium metal cards, goes from 1% to 2% or 3%. Even if you lose a little bit of market share, you're still getting so much growth in terms of units and dollars that there's a long runway for organic growth, even as your market share goes from basically being virtually the only player in a market with 90% share to 80% and 75% or something.

We think that if you look to where the puck is going on the issuer side and the focus on premium metal cards, CompoSecure is in the pole position to maintain a very large market share and to have outsized organic growth.

I can speak to having a card expire recently and then getting my new card, and it was upgraded to a metal card. That's just a perfect example of a mix shift moving in their direction and how that can continue to happen over time.

But you did mention Apple Pay. There's this natural question: once that was released, will we ever need wallets again? Will we ever need to carry credit cards? How do you frame that risk from Apple Pay?

6. Apple Pay Tests the Thesis

This is probably the most important question in breaking down this business and thinking about it long term. It really was the biggest concern we had when we first invested in CompoSecure, before David Cote's involvement, as I mentioned.

It is a really important and interesting topic, and it's worth thinking about the disintermediation risk from mobile wallets and Apple Pay. I'll address it in 2 ways.

The first is that, back when we first invested in the company, it was valued as if no one was going to use a credit card in 3 or 4 years. The company was trading at 5 times normalized free cash flow. When we did our work then, we came away with the conclusion that cards were going to be around for at least 5 years, and we were going to make good money on this investment because it was priced as if it would be disintermediated in the near term.

Cards were still growing at double digits, and all of these new fintechs and neobanks were looking to get into the premium card business. That was the story then.

Fast-forward a few years to now. It's still an important question, but the data shows that the premium metal card has become increasingly important, not the other way around, even as Apple Pay, mobile wallets, and other things have taken off. You're seeing that customer response getting stronger, not weaker.

Take a look at American Express. When they did one of their first big product refreshes, back in 2016, and introduced the brand-new, shiny American Express card with a higher annual fee, net new accounts acquired went up by 50% over the pre-refresh period.

When American Express introduced the new product refresh earlier this year, you saw net new account acquisition go up by 2x. So the customer response was double in 2025 what it was in 2016, even though mobile wallets, Apple Pay, and everything else are more prevalent today.

Customers are still showing that they want a top-of-wallet physical card and the status and prestige that brings among their friends.

The second point is that when you look at even digitally native companies that have some aversion to physical assets, like Coinbase, Robinhood, and Gemini, all of them are coming out with brand-new premium cards that are physical metal cards as a customer-acquisition tool, and they are all CompoSecure customers.

Even these companies that are at the leading edge of everything digital are manufacturing and distributing cards to their customers. Instead of giving you 4% cash back, they'll give you 4% in Bitcoin back. It shows that this tool is still incredibly important.

Third, when you look at Apple itself, Apple was one of the first companies to try a card that did not have a physical card and was only digital. The Apple Card program did not take off the way people anticipated it would. It really did not resonate with the high-end consumer.

The reports have been that Goldman Sachs has lost quite a bit of money on it and is now trying to transfer it over to maybe JPMorgan. So the experiment with a purely digital card has not taken off yet.

Lastly, while I do think that in 20 years, or over some long time period, this does become a bit of a risk, you also have to consider that the third most frequently used form of payment even today is cash—not mobile wallets or anything else.

Credit cards are number 1 at 35%, debit cards are at 30%, and 17% of transactions are still done with cash. It's incredible to people who live in New York or San Francisco, but there are plenty of places that, forget about accepting metal or plastic, don't accept anything but cash.

So the tail for physical credit cards is going to be longer than expected rather than shorter. This is a risk, and you've got David Cote and his team here to address it and put the company—whether it's with the security and authentication at Arculus, with M&A, or with other things—in a position to really get ahead of this risk in the long term.

It's a really interesting theme. I would have put myself in the camp of expecting physical cards to shrink in the near term and medium term. But as you dig deeper and look at the actual data and the precedent, and then consider cash or checks—the amount of checks that I still have to write and the number of checkbooks that I still have to receive—it's still a piece of the payments infrastructure system, and that does a lot.

It's interesting to hear how you frame that risk as being real over 20 to 25 years. But in the near term, the signals are pointing in the other direction.

I wanted to transition a little bit to the margin side of the equation. Now that they're public, it's out there for the world to see. We see some companies that perhaps fear going public because then they would release those margin numbers to their customer base.

Talk about what those actually look like. How good of a business is this in terms of what they're driving inside the financial statements?

Our first fear was, when the company came public, “Oh my God, everyone's going to see that you have 50% gross margins and 40% EBITDA margins. American Express and Chase are going to see this, and all of this is going to go down.”

I think when you really dig into their competitive position and the advantages they have from the technology, the manufacturing, and the customer relationships, they've been able to maintain those margins even as all the competitors see them, even as the customers see them and renew contracts.

You got a nice glimpse into the business when they published their 2024 10-K. They broke out the segment financials for the first time and separated Arculus from the core metal card business.

And you could see that the metal card business has 53% gross margins and core EBIT margins of 40%. There’s very little in the way of CapEx and depreciation, with EBITDA margins of 42%. One of the fascinating things is that there’s virtually no marketing spend at the core metal business because you’re really the dominant player in the industry, and you’re so well known to the largest and most important issuers that you don’t need to convince them to use you. Others come to you as well.

So, if you think about the business, in 2024 it did a little over $400 million of revenue, and they sold about 31 million cards. The average ASP for the card business was about $13. Gross margins are a little over 50%. Each card costs about $6.20 per card.

That’s 6 times more expensive than what your general plastic card costs, and that’s because of all of the technology, the raw materials, and the quality that goes into that card. You’ve got your EMV chip, which could cost $1 a card. You’ve got incredibly sophisticated materials, including stainless steel. They make certain cards for different co-branded partnerships.

They’ve used recycled aluminum from a Boeing 737 fuselage to make a Delta co-branded card. They’ve used Corning Gorilla Glass to make a glass card. It really is a sophisticated manufacturing process. So, between the manufacturing, the EMV chip, and the technology, you get around a $6 unit cost for the card, and that gets you your 50% gross margins.

It’s a pretty efficient business thereafter. You have 40% EBITDA margins and a really, really attractive business on a unit basis. They also showed the unit economics on the Arculus side. This was a really interesting thing because, up until then, you really didn’t know.

They would tell you a little bit about Arculus—it was a double-digit net investment—but you didn’t know what it was. Then you saw that Arculus had 80% gross margins and that its revenue had grown from less than $2 million in 2023 to almost $11 million in 2024.

When we think about the use cases, how big that TAM can be, and a business that could be cross-sold and have all this integration into your existing high-end issuer base, we think 80% gross margins and a long runway for growth, with security and authentication being so much more valuable in the future, give Arculus a lot of potential as well. Even though it is not providing a ton in terms of segment EBIT or anything like that, it’s a really fascinating business, and that glimpse of the unit economics was very important.

It’s amazing to hear about the usage of some of those unique metals and then being able to keep the margin, because I would imagine it’s a pretty efficient manufacturing process to do what they’re doing. Introducing some of those unique products, like the gold and the glass that you mentioned, is quite interesting. It probably speaks to something on the manufacturing side of things.

When you put it all together, just from a top-line perspective, I had that number of net new cards, but also just card growth, in my head. When you put everything, including Arculus and the legacy business, together, what does reasonable top-line growth look like, whether it’s a traditional GDP environment or anything along those lines? How do you think about revenue growth in terms of trajectory?

If you think about the drivers of revenue growth, you’re going to have the units on the premium metal card side, you’re going to have ASP on the card side, and then you’re going to have Arculus. We’ll try to tackle each one of those things. We actually think that within the metal card business, units are probably going to grow faster than the ASP, as you’ve got so many more really incredible card issuers, neobanks, and fintechs fighting for this customer-acquisition tool.

We think that the premium metal card business will grow at a high-single-digit to low-double-digit rate on a unit level. Within that, as that volume grows, we anticipate that the average selling price for high-volume issuers like American Express and Chase will probably go down. You make 13 million cards for Chase and American Express. If you start making 20 or 25 million, I anticipate that your ASP goes down.

You flip it over to a Robinhood Gold card and some of these cards that cost $50, $100, or $500 per card at smaller volumes. That’s what I think will grow your ASP at a low-single-digit rate. It’s an interesting mix within that, and you see a glimpse of some of this in the customer agreements. As you’ve had the ASP for American Express and Chase go down a little bit, the aggregate ASP has gone up because of these new customers.

We anticipate that the premium metal card business can get you to a double-digit organic growth rate. On the Arculus side, it’s going to be a lot higher than that. It’s tough to tell what it could be, but when you think about the cross-selling opportunities—for example, on the Chase Sapphire card, you’re using the EMV technology, but you really have not incorporated all of the security and authentication tools yet—given the long relationship between CompoSecure and Chase, that could be an opportunity for future growth.

When you look at all the other use cases for an Arculus, we can look at a couple of companies. For example, there’s a cold-storage competitor called Ledger. They’re not public, but there’s some data that suggests they have maybe $70 million of revenue selling crypto cold wallets. Then you look at a company like Yubico, which is a security-dongle company in Sweden. They have something like $250 million in revenue selling security devices for enterprise customers.

Arculus could provide both of those and perhaps be a cleaner and more efficient tool. You’re looking at $300 million-plus of revenue right there. We’re not sure when and how that evolves, but it’s going to be additive to the overall growth rate. I would say, as a baseline, we anticipate 10% organic growth, and then you add Arculus, and then you add potential M&A from Dave Cote, and we could see this having a lot higher growth than that.

The Arculus business is quite interesting because there are obviously numbers out there, but it’s hard to appreciate how quickly it might be adopted or over what timeline that looks like. For any listeners, cold wallets are just a way of moving something off the internet. Most crypto wallets are connected to a bunch of digital things, and that could increase security risk. This gives you something that’s offline, so it’s worth mentioning that part.

It’s interesting to frame it in that regard, and particularly the pickup you could also see from some of the legacy customers. I know they split this business out on its own, but it does feel like there could be potential overlap in terms of how they’re targeting customers in the future, together with the legacy business. That’s quite interesting.

I did want to get some understanding: Are there competitive threats beyond Apple Pay? Are there other competitors in the metal card space? You mentioned some of the cold wallets, but what would you say that landscape looks like?

There are definitely some competitors that are encroaching—a hodgepodge of competitors, mostly those who have historically focused on the lower-end general plastic card. But if you look at the growth and the margins that CompoSecure has, coming from virtually a monopoly position, it’s only natural to think that there are going to be some capitalistic instincts and some competitive threats.

There is a good list of competitors that are in the manufacturing business and are looking to get into this. You can think about IDEMIA and Thales in Europe. You could think about CPI Card Group, which is the largest card manufacturer in general plastic cards, and a host of others. We anticipate that all of them have been, and are going to continue, trying to get into this business.

It is conceivable that some of them, with the right resources, do start producing metal cards for some more marginal issuers. We would not anticipate that Chase or American Express takes their business over, partly because of what we talked about. This is such an important business for them, and the cost of a CompoSecure card at $12 or lower for these issuers isn’t enough to risk a lower-quality or less-experienced supplier. So, we don’t worry about that.

But if you do think about less well-capitalized card issuers coming into the space, we do know that IDEMIA and Thales, as probably the most well-capitalized and technically proficient companies, are probably going to start taking some share. IDEMIA and Thales, interestingly, are both competitors, but they’re also actually resellers. CompoSecure manufactures some premium metal cards for them for different issuers in international and other areas.

It could be because those companies have much larger sales forces. They can go out and reach certain issuers internationally that CompoSecure can’t, but they don’t have the technological expertise and the manufacturing know-how that CompoSecure has. In a way, they are resellers for CompoSecure.

But for any company that comes in with this much of a head start in market share, it’s natural to think that you’re going to lose a couple of things. I would be surprised if they did not continue to grow with Chase, American Express, and the premier fintechs and neobanks like Robinhood and Coinbase, and so forth. But I would anticipate that IDEMIA, Thales, and some other producers like FCS and others will start to encroach on the new entrants to this business.

It’s natural to attract that competition over time. It’ll be interesting to see how they compete. You’ve made a few references to Dave Cote’s track record with M&A, and I think it’s a perfect opportunity to introduce that, maybe introduce Resolute Holdings and that interesting dynamic into this business.

Maybe you can lay out the framing for how you think about CompoSecure’s potential to make acquisitions, how Dave’s history plays into it, and then we can address Resolute in detail or follow up with questions that I might have around it.

7. Dave Cote Builds the Acquisition Engine

For anyone who doesn’t know Dave Cote, I would suggest reading his books. It really is an incredible masterclass on focusing on the long term and on the short term. He has a book called Winning Now, Winning Later and another book called How to Be a Leader, and these are incredible books.

Dave took over as the CEO of Honeywell in 2003. If you go back then, 9/11 had just occurred, and you had the dot-com bubble explode. Honeywell had the aborted merger with GE that was blocked by the EU, so Honeywell was in a bit of a tough spot. I think the quarter before he took over, it had negative 4% organic growth.

By the time he left 15 years later, revenues were up 100%, EPS was up 400%, and the stock was up 500%—more than double what the S&P was. Then he became the chairman of a company called Vertiv, which provides liquid cooling systems for data centers. In the 5 years that he was chairman, that stock went up by close to 600%.

We’ve got a very good relationship with CEO Jon Wilk, and Jon has told us, “You’ve never met a guy who’s more hard-charging, focused, and relentless than Dave Cote.” It’s not only about operational improvement; their approach to M&A is very, very similar. You guys have had Brad Jacobs on the Colossus podcast talking about the right approach to M&A. Dave Cote’s approach is very, very similar, and it really comes with a few guiding principles.

One of the first would be to build a robust internal pipeline of potential deals so you’re not wedded or desperate to any single deal. So, date a lot of people and have a lot of options out there. You really focus on good businesses with strong competitive positions that have not been run to their full potential, either because of underinvestment, lack of focus, or something else. But you’re not buying broken businesses. You’re buying good businesses that should be better than they are.

There’s a willingness to pay a fair price but not to overpay. You begin the integration process before the deal closes. As soon as you have an agreement, you are working with the teams to integrate that business, take your best practices—what was the Honeywell Operating System and is now the CompoSecure Operating System—and integrate that. It’s that M&A potential that people are excited about.

You mentioned Resolute Holdings. This is a fascinating case study because if you take something like QXO, which is the new building products endeavor by Brad Jacobs, it receives a bit of a halo valuation because of Brad’s incredible track record of creating shareholder value. At CompoSecure, we’ve done something a little different in that we’ve spun out the asset management side. We’ve spun out the capital allocation business into something called Resolute Holdings.

Resolute’s job is to allocate capital, do strategic M&A for CompoSecure, and eventually do it on its own. But the initial view is that it’s going to be focusing on M&A for CompoSecure. It’s quite fascinating because Resolute was spun out to shareholders of CompoSecure. We’ve got an interest in both of these entities now.

Resolute Holdings’ stock has done exceptionally well, so it is valued relatively richly today because you don’t have much in the way of revenues. Resolute gets a 10% share—a 10% royalty, if you will, a management fee—on CompoSecure’s EBITDA. The stated goal is, “We are going to grow the EBITDA at CompoSecure by many, many fold.” The market believes, “Look at Mr. Cote’s track record. We’re going to do this.”

Right now, the revenues at Resolute Holdings are around $15 million, and that’s basically the cost of looking for deals. We’ve got employees on the ground doing due diligence, and that will grow as the CompoSecure EBITDA grows. So, you have this symbiotic relationship where the team at Resolute Holdings is focused on growing the EBITDA at CompoSecure by 50%, or doubling or tripling it, and the market is giving a halo valuation to Resolute Holdings.

I don’t think you really have priced that into CompoSecure yet. If you look at Resolute Holdings, it’s valued at about a $700 million market cap. If you look at a high-growth asset manager multiple, it implies that CompoSecure’s EBITDA should be double or more of what it is today. With Mr. Cote’s controlling interest in both companies, you’ve got a strong alignment of interest. So, it’s a really fascinating case study on what we’re going to see in real time between capital allocation and M&A.

There was an announcement that was a bit of a head-scratcher to me, and I can’t say that I necessarily loved it at the time. But I also look at Dave Cote. He’s brought Tom Knott, who was the Goldman banker who worked with him on Vertiv and then came over with CompoSecure. We’ll see over time how it plays out. It’s just a very interesting structure.

You framed it perfectly there in that it will act as a case study in terms of value unlock within businesses. On the M&A side, would you expect that acquisitions would be very overlapping and naturally tuck in? They could be bigger in size but fit the overall strategy. Could you see them diversifying away?

Do you have any read on that? I would expect M&A given Cote’s track record. I think he’s made 150, 200-plus deals in his career, so he’s familiar with it in the same way that Brad is. What would you expect in terms of sticking with the core business lines versus extending out?

We have no knowledge of any transaction, but we would anticipate it is in the payments, hardware, technology, software, security, and authentication verticals, so that it will look like an adjacency to where CompoSecure is today. One of the biggest reasons we get comfortable with the long-term physical card disintermediation risk is that there are so many opportunities to grow this business from its pole position in physical card manufacturing to these different adjacencies, whether they’re recurring software revenue lines or adjacencies on the hardware side.

It’ll initially be in the payments space. Longer term, I could see diversification being implemented, and I think that would very much be positive because you would reduce some customer concentration and reduce some long-term industry disintermediation risks. It would morph into a much higher-multiple business.

One of the things that you will always expect is that it will be done at an appropriate valuation and will be in the interest of shareholders. When you get people like Dave Cote, we get questions like, “Well, how do you know he’s going to do a good deal again?” And you say, “Okay, well, last year he bought a controlling interest in CompoSecure at $7.50 a share. Today, you get a share of CompoSecure at $20 and Resolute Holdings at $80.”

So, he did a great deal last year. He’s going to continue to do good deals, and he’s shown you the playbook of how he’s going to do it. It’ll be interesting to see how all of this plays out, but initially payments, longer term probably diversification, with shareholder value as the primary North Star.

It’s going to be fascinating to watch. With Resolute, I’ll call it a dislocation in terms of how it’s trading, which made me scratch my head a few times. You wonder what is being worked on and what’s happening. I guess, if we’re to tie everything together, you mentioned the stock has had a nice run over the past year, year-plus. What still stands out as the main catalyst for this business?

There are several. If you look at the reaction to American Express’s earnings last week, the stock did great, and they raised their guidance. The premium metal card is still the best customer acquisition tool for the high-end credit card holder. All of these companies are going to continue to invest resources, and it’s going to be driven by American Express, Chase, and a lot of other issuers and neobanks.

The market recognition of that durable growth and CompoSecure’s pole position as the key supplier—I think that is one key catalyst. I also think getting Arculus to the point where it starts being a material contributor and starts having a positive cash flow contribution instead of a small negative, as well as the cross-selling opportunities in security and authentication, is a big catalyst and could change the narrative on the company. And then, of course, the M&A debut—I think everyone’s trying to see what they’re up to, but it’ll be an interesting one.

On the other side of the spectrum, in terms of the risks and, in theory, what would keep you up at night, for lack of a better cliché, what’s most prominent?

Near term, you look at the response to the Chase and American Express refreshes. Near term, I feel pretty good about where the business is going. Long term and medium term, you’ve got to keep an eye on competition.

There are really sophisticated and well-capitalized competitors in IDEMIA, Thales, and others, and you’re not going to have a monopoly forever. You have to innovate. You have to continue to grow with your customers. Competition is really always at the forefront of any business.

And then the mobile wallet issue—it’s the elephant in the room. In the next few years, it’s not an issue, but that is something that you definitely have to keep an eye on in the long term. We have full faith in the team at Resolute, but there is a structure in which they get paid on the EBITDA of CompoSecure. You do have to think about the long-term alignment of those interests. But given Mr. Cote’s controlling interest and holdings in both companies, that’s not a near-term concern.

But those are the things I would think about long term that we have to keep an eye on.

Those all make sense. This has been absolutely fascinating. I am biased because of my particular interest in this name, but I appreciate you getting into some of the history and details in terms of their positioning in the market and what it looks like from your perspective, having the history. As we close out, we always try to cover lessons that you can pull away at maybe a broader level and apply elsewhere. What would stand out to you from Compo?

The whole history and our involvement with the company has been a fascinating learning experience, but the biggest takeaways and what we've learned from it is finding overlooked and not well-understood businesses that are actually mission-critical to large, entrenched, and growing customers, with a cost that is minuscule compared to the ROI that the customer has in their core product. Like selling a $12 premium metal card to Chase and American Express, that is an incredibly powerful tool. And you've had a bunch of businesses on the podcast in the past, whether it's a company like TransDigm that will sell a proprietary $200 widget that goes on a $100 million Boeing or industrial gas businesses like Air Products that provide a small key input into a multibillion-dollar refinery or chemical plant. Finding these businesses in which you are mission-critical, exceptionally high-value, low-cost, and entrenched, they're fascinating businesses. And then on CompoSecure 2.0 with David Cote, it turns into, what can he do here? Watching that capital allocation unfold is going to be very interesting.

Parsa, this has been a true pleasure. You hit on my favorite theme there at the end with those mission-critical businesses and representing a small cost to the end customer. That is one that I absolutely love. So thank you very much for joining us and sharing the knowledge here.

Absolutely, Matt. Thank you very much for having me.