MinuteKey 35 And AI Investments Will Transform Future Operations

Key Takeaways

• Strategic acquisitions and technology investments aim to drive long-term organic growth and improve operational efficiencies, enhancing revenue streams and margins.
  
• Optimizing the global supply chain by shifting from China increases efficiency and cuts costs, boosting gross margins.
  
• Market softness, housing downturns, and cost pressures threaten Hillman's revenue growth, margins, and financial targets amid strategic acquisition dependency.

Catalysts

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

• Hillman’s strategic plan involves achieving $2 billion in net sales over the next 3 to 5 years through core business growth, market growth returning to 2% to 3%, and new business wins, which is expected to contribute 5% to 6% organic top-line growth. This growth trajectory is likely to directly impact the revenue.
  
• The company plans to execute 2 to 3 acquisitions per year, complementing their existing business and creating opportunities for long-term organic growth. These acquisitions can enhance the company’s revenue streams and net margins due to synergies and cost efficiencies.
  
• Investment in technology, including cloud migration and artificial intelligence implementation, is expected to increase operational efficiency and improve gross margins by potentially reducing the cost of goods sold and streamlining operations.
  
• The rollout of the MinuteKey 3.5 strategy is expected to boost the Robotics and Digital Solutions (RDS) business unit’s growth, with long-term improvements in adjusted EBITDA and cash flow generation anticipated. This strategy also suggests an improvement in gross margins from a higher margin product mix.
  
• Hillman’s enhanced global supply chain and shift of sourcing from China to Vietnam and other countries is expected to lead to a more efficient distribution network and improved gross margins through reduced costs and operational efficiencies.
  

Hillman Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hillman Solutions's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.2% today to 5.4% in 3 years time.
• Analysts expect earnings to reach $93.5 million (and earnings per share of $0.47) by about March 2028, up from $17.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $103 million in earnings, and the most bearish expecting $84 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.1x on those 2028 earnings, down from 111.0x today. This future PE is greater than the current PE for the US Machinery industry at 22.1x.
• Analysts expect the number of shares outstanding to grow by 0.66% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.12%, as per the Simply Wall St company report.

Hillman Solutions Future Earnings Per Share Growth

Risks

• Market softness during 2024 was reflected in the decline of net sales, foot traffic reduction at retail customers, and a 5-point market volume reduction, potentially posing a risk to future revenue growth if such conditions persist.
  
• The existing home sales fell to a 30-year low and remodeling spending declined year-over-year, which could continue to negatively affect Hillman's revenue if the housing market does not recover as expected.
  
• The company's financial guidance for 2025 assumes a 1% decrease in market volumes, which, if worsened, could further impact Hillman’s ability to achieve its projected $1.535 billion in net sales.
  
• Potential risks associated with the company's reliance on strategic acquisitions for growth could negatively impact earnings if the acquisitions do not perform as expected or if integration challenges arise.
  
• Tariff uncertainties and possible increases in freight and labor costs without corresponding price adjustments could pressure Hillman's gross margins if these costs cannot be effectively offset or passed on to customers.

Valuation

• The analysts have a consensus price target of $13.281 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 $11.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $1.7 billion, earnings will come to $93.5 million, and it would be trading on a PE ratio of 36.1x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $9.71, the analyst price target of $13.28 is 26.9% 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.