Cost Controls And Decisive Acquisitions Set To Fuel Robust Earnings Growth

Key Takeaways

• Hillman Solutions' focus on cost control and margin management is set to enhance bottom-line performance and adjusted EBITDA outlook.
  
• Strategic low-risk acquisitions and continuous innovation are projected to drive significant top-line growth and operational efficiency.
  
• Hillman faces challenges from a soft macroeconomic environment, lower sales in its Robotics and Digital Solutions segment, and reduced consumer demand due to a decrease in existing home sales.

Catalysts

Provides hardware-related products and related merchandising services in the United States, Canada, Mexico, Latin America, and the Caribbean.

• Hillman Solutions is expected to continue controlling costs and managing margins, leading to a strong bottom-line performance and increased adjusted EBITDA guidance, impacting future earnings positively.
  
• Expected to execute accretive low-risk tuck-in acquisitions that will not only contribute to EBITDA growth due to the natural synergies but also drive additional top-line growth, impacting revenue and net margins.
  
• Continued innovation and development of patented and proprietary products by Hillman's product managers and engineers, expected to lead to new business wins and allow the company to grow in excess of historical new business growth rate, positively affecting revenue.
  
• Strong free cash flow expectations remain unchanged, providing financial stability and ability to fund growth initiatives, impacting the company’s investment in future growth and shareholder returns.
  
• Net debt and trailing 12-month adjusted EBITDA ratio showing a significant decrease, expected to de-lever throughout the year, reflecting financial strength and operational efficiency, impacting the company’s ability to invest in growth opportunities positively.

Assumptions

• Analysts are assuming Hillman Solutions's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.4% today to 5.7% in 3 years time.
• Analysts expect earnings to reach $96.3 million (and earnings per share of $0.49) by about September 2027, up from $6.0 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 31.5x on those 2027 earnings, down from 310.8x today. This future PE is greater than the current PE for the US Machinery industry at 20.5x.
• Analysts expect the number of shares outstanding to grow by 0.73% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 7.48%, as per the Simply Wall St company report.

Risks

• The macroeconomic environment remains soft, potentially impacting Hillman's net sales expectations by contributing to a revision of their full-year net sales guidance downward, reflecting a 1% decrease over their 2023 net sales, which could directly affect revenue.
  
• Hillman's Robotics and Digital Solutions (RDS) segment experienced an 8% decrease in net sales compared to the year ago quarter, with challenges such as lighter foot traffic and discretionary spending softness, which may continue to pressure revenue and margin performance in this segment.
  
• A significant decrease in existing home sales in the U.S., falling to the lowest level since 1995, and continuing through 2024 at a similar level to 2023, presents a headwind that can potentially dampen consumer demand for Hillman's products, impacting net sales and revenue growth.
  
• The company's expectation for its full-year 2024 free cash flow to remain between $100 million to $120 million hinges on its ability to maintain adjusted EBITDA offsets against revised top-line expectations, introducing a risk to cash flow projections if sales performance further weakens or if costs cannot be controlled as expected.
  
• Hillman's increased reliance on tuck-in acquisitions for growth, such as the mentioned acquisition similar to Koch, introduces execution risk and potential integration challenges that could affect earnings if synergies or top-line growth opportunities do not materialize as planned or if these acquisitions lead to unexpected costs.

Valuation

• The analysts have a consensus price target of $12.22 for Hillman Solutions based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $16.0, and the most bearish reporting a price target of just $10.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.7 billion, earnings will come to $96.3 million, and it would be trading on a PE ratio of 31.5x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of $9.57, the analyst's price target of $12.22 is 21.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.