Dual Faucet And Intex Acquisitions Will Secure Supply Resiliency

Key Takeaways

• Diversification of supply chain and strategic pricing are key to mitigating tariff impacts and improving financial stability.
  
• Growth through acquisitions and innovative technology deployments could enhance revenue and profitability despite anticipated volume declines.
  
• Hillman's reliance on Chinese suppliers, alongside tariff and debt uncertainties, could reduce profitability and limit growth due to increased costs and potential demand reduction.

Catalysts

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

• Hillman is implementing a Dual Faucet strategy to reduce reliance on Chinese suppliers, targeting a reduction to 20% by year-end 2025. Diversifying their supply chain could mitigate tariff impacts and improve margins.
  
• Price increases are planned to mitigate the $250 million tariff impact. Successful implementation could stabilize revenue despite anticipated volume declines, balancing the financial impact of tariffs on earnings.
  
• The acquisition of Intex and new business wins are driving net sales growth, contributing approximately 6% to sales. Integration and synergies from acquisitions may enhance revenue and profitability.
  
• Rollouts of MinuteKey 3.5 machines in the Robotics and Digital Solutions segment mark a return to growth, potentially boosting future revenues and margins as deployment continues through 2026.
  
• Despite projected volume declines, Hillman maintains stable adjusted EBITDA guidance, indicating efficient cost management and operational resilience, potentially enhancing net margins in the long term.

Hillman Solutions Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hillman Solutions's revenue will grow by 5.0% 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 $93.4 million (and earnings per share of $0.51) by about April 2028, up from $18.4 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 $57 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 32.0x on those 2028 earnings, down from 75.1x today. This future PE is greater than the current PE for the US Machinery industry at 21.3x.
• Analysts expect the number of shares outstanding to grow by 0.68% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.27%, as per the Simply Wall St company report.

Hillman Solutions Future Earnings Per Share Growth

Risks

• Hillman's reliance on suppliers from China and the impact of tariffs could significantly increase costs, and although they plan to mitigate this through price increases, there is a risk these increases could reduce demand, impacting revenue and margins.
  
• The expectation that tariffs and pricing pressures might lead to a 17% decline in market volumes in the second half of 2025 poses a risk to projected sales growth and earnings.
  
• The ongoing geopolitical and economic uncertainties, including political changes and consumer health, could negatively impact Hillman's revenue and earnings if market conditions deteriorate.
  
• Historical challenges such as COVID-19, rampant inflation, and supply chain disruptions demonstrate the potential for unexpected costs and operational inefficiencies that could affect profitability.
  
• The company's elevated debt levels and leverage ratio, coupled with the uncertainty over tariff costs and cash flow timing, could strain Hillman's financial flexibility and ability to invest in growth initiatives, affecting future earnings and value generation.

Valuation

• The analysts have a consensus price target of $11.714 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 $8.0.
  
• 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 $93.4 million, and it would be trading on a PE ratio of 32.0x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of $7.01, the analyst price target of $11.71 is 40.2% 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.