Intex And Koch Acquisitions Will Expand Offerings And Drive Future Expansion

Key Takeaways

• Acquisition and integration efforts position Hillman for enhanced offerings and expansion, likely boosting revenue and adjusted EBITDA.
  
• Structural improvements and new pricing strategies are expected to sustain or enhance earnings through efficiencies and a favorable product mix.
  
• Hillman Solutions faces challenges with weak sector sales, tariff vulnerabilities, elevated integration costs, market volatility, and credit risk exposure affecting profitability and growth expectations.

Catalysts

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

• Anticipated reduction in interest rates is expected to unlock substantial home equity for U.S. homeowners, potentially boosting home improvement expenditures and, consequently, Hillman's revenue.
  
• Hillman's acquisition of Intex and successful integration of Koch positions the company for enhanced product offerings and expansion opportunities, likely increasing its revenue and adjusted EBITDA.
  
• Structural improvements to gross margin through efficiencies and a favorable product mix, along with potential new pricing strategies, are anticipated to sustain or enhance earnings.
  
• Deployment and expansion of MinuteKEY 3.5 machines are expected to return the Robotics and Digital segment to growth, improving both revenues and EBITDA margins in 2025.
  
• Strong strategic relationships and recognition from major customers like Lowe's and Home Depot could lead to greater market share and revenue growth alongside these retail partners.

Hillman Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hillman Solutions's revenue will grow by 5.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.6% today to 5.2% in 3 years time.
• Analysts expect earnings to reach $89.7 million (and earnings per share of $0.45) by about December 2027, up from $8.4 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 37.6x on those 2027 earnings, down from 230.7x today. This future PE is greater than the current PE for the US Machinery industry at 22.7x.
• Analysts expect the number of shares outstanding to grow by 0.38% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.65%, as per the Simply Wall St company report.

Hillman Solutions Future Earnings Per Share Growth

Risks

• Hillman Solutions faces a potential decrease in customer demand as RDS sector sales have been weak for several quarters, which could impact revenue growth expectations.
  
• The company has a significant percentage of its products sourced from China, leaving it vulnerable to potential tariff increases that could increase costs and impact net margins.
  
• Hillman expects elevated SG&A expenses due to recent acquisitions and integration costs, which could reduce net margins if savings aren't realized as anticipated.
  
• Market volatility, particularly related to ocean freight costs, poses a risk to maintaining gross margins; unexpected increases could pressure profitability unless they can be passed to customers.
  
• The recent Chapter 11 filing by True Value Hardware, and subsequent receivables write-down, highlight credit risk exposure, potentially leading to future earnings volatility if more customers face financial difficulties.

Valuation

• The analysts have a consensus price target of $13.66 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 $12.0.
• 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 $89.7 million, and it would be trading on a PE ratio of 37.6x, assuming you use a discount rate of 7.7%.
• Given the current share price of $9.88, the analyst's price target of $13.66 is 27.7% 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.