2 weeks Ago
Onfokus In December 2023, I initiated coverage for Cadre Holdings, Inc. ( NYSE: CDRE ) with a buy rating. That buy rating unfortunately has not shown the market-outperforming returns I was looking for.
However, in this report I will discuss the most recent earnings, risks, and opportunities and explain why I continue to believe that the stock is a buy from a fundamental perspective. For those that are unfamiliar with Cadre Holdings; the firm is a provider of public safety solutions, providing a wide range of products and services. For a more detailed description of the company’s business, I refer to my previous article on Cadre Holdings .
Cadre Holdings' Successful M&A Strategy Shows Cadre Holdings Cadre Holdings management does not spend a lot of time detailing their results and year-on-year variations. Maybe that is also not odd, given that the elevated M&A activity of the company somewhat skews the growth picture. Sales grew 19.
2% driven by the acquisitions and integration of ICOR and Alpha in combination with higher demand for armor and duty gear products. The cost of goods increased 21.8% driven by inventory amortization related to the acquired companies.
That had a 170 bps gross margin and brought the margins to 40.6%. In the comparable period last year, the margins were 41.
9%. So, we do see that excluding the amortization impact, there continues to be margin expansion. SGA grew 13.
3%, which also reflected recent acquisitions. Operating income grew 25.6% to nearly $20 million and showed income growth exceeding sales growth.
Adjusted EBITDA grew by 24% to $28.3 million. A lot about Cadre is focused on acquisitions through growth and that might make the growth numbers year-on-year a bit less useful, but it is good to see that the company is acquiring businesses and expanding adjusted margins.
To me, this is a sign that the company is successfully integrating high-quality companies that are accretive to margins. Cadre Holdings Revises Guidance, Upside Limited Due To Cybersecurity Incident Cadre Holdings For 2024, Cadre Holdings is now expecting $571 million to $582 million in sales. This represents 19.
5% growth at the mid-point and provides an $18 million lift on the lower end of the guidance and $10 million at the higher end of the guidance. Adjusted EBITDA of $103 million to $109 million represents 23.5% growth year-on-year, showing the continued margin expansion.
Driven by a cybersecurity incident in Q3, the adjusted EBITDA guidance has not been raised. In Q3, due to lower productivity the margins and sales are expected to be pressured with flat sales year-on-year, but Cadre Holdings expects that much of the sales and margin loss in Q3 will be recaptured in Q4. What Are The Risks And Opportunities For Cadre Holdings? Cadre Holdings has significant opportunities ahead.
The elevated threat environment globally drives budgets for public safety services, and the M&A fueled growth allows for margin expansion. There are also some risks. Any weakening in the environment for M&A either due to financing pressures or the pipeline of takeover candidates weakening could put a pressure on growth and even lead to shareholder dilution.
Earlier this year, the company issued 2.75 million shares raising around $91 million which effectively diluted shareholders by around 7.5%.
So, shareholder dilution seems to be a risk. Furthermore, it should be noted that there is $191.7 million in debt maturing in 2026.
With cash and cash equivalents of $105.9 million and positive cash flows in the years ahead, I don’t expect that there will be major issues servicing the debt. However, it does increase the chances that for continued M&A there will be shareholder dilution.
Is Cadre Holdings Stock A Buy? The Aerospace Forum To determine multi-year price targets The Aerospace Forum has developed a stock screener which uses a combination of analyst consensus on EBITDA, cash flows and the most recent balance sheet data. Each quarter, we revisit those assumptions and the stock price targets accordingly. In a separate blog I have detailed our analysis methodology .
Driven by continued M&A activity, the EBITDA estimates for 2024 and 2025 have been increased by around 17% and even 30% for free cash flow estimates. This leads to a lift of the price target to $46.25 based on a peer group valuation, providing 28% upside from current levels and a lift to the 2024 price target of almost $6 per share.
In the years ahead, the projections even show 70% upside, but we remain mindful of any further shareholder dilution. Conclusion: Cadre Holdings Is An Attractive Stock I believe that Cadre Holdings remains very attractive, despite shareholder dilution seen this year and a cybersecurity incident that will pressure third quarter earnings. The company continues to see opportunities to grow through acquisitions and expand its gross margins beyond the mid-40s seen now.
The only thing that I found unfortunate is that given the M&A activity, Cadre Holdings, Inc. barely provides any figures on inorganic growth. If you want full access to all our reports, data and investing ideas, join The Aerospace Forum , the #1 aerospace, defense and airline investment research service on Seeking Alpha, with access to evoX Data Analytics, our in-house developed data analytics platform.
Dhierin-Perkash Bechai is an aerospace, defense and airline analyst. The Aerospace Forum Learn more Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions.
I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Seeking Alpha's Disclosure: Past performance is no guarantee of future results.
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