Safety Equipment Innovations And Calculated Acquisitions Set To Propel Growth

Key Takeaways

• Cadre's focus on continuous improvement and strategic acquisitions aims to surpass natural growth rates and enhance profitability through expanded offerings and geographic reach.
  
• Increased global demand for Cadre's mission-critical safety equipment, driven by public safety spending and favorable macro trends, is expected to positively impact net sales and revenue growth.
  
• Cadre Holdings' financial stability could be jeopardized by cybersecurity threats, reliance on public safety spending, acquisition strategies, and sector-specific demand fluctuations.

Catalysts

Manufactures and distributes safety that provides protection to users in hazardous or life-threatening situations in the United States and internationally.

• The continuous improvement and deployment of the Cadre operating model is expected to further enhance the company's performance and execution, leading to profitability improvements above their natural growth rate. This could impact net margins positively.
  
• The growing global demand for Cadre's mission-critical safety equipment, driven by favorable macro trends and public safety spending, is likely to increase net sales and potentially impact revenue growth positively.
  
• Cadre's strategy of leveraging mergers and acquisitions to expand its product suite, grow its geographic footprint, or enter new verticals, coupled with its strong financial position (net leverage down to 1.1x), positions it to execute accretive transactions that can enhance earnings.
  
• The expected completion of at least one acquisition before the end of 2024 indicates potential for growth acceleration in existing markets (law enforcement, military, nuclear), which could contribute to revenue growth and diversification.
  
• The introduction and positive reception of new products in the past 18 months across many categories highlight Cadre's focus on innovation, which could drive adoption and increase sales, impacting revenue positively.

Assumptions

• Analysts are assuming Cadre Holdings's revenue will grow by 8.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.5% today to 10.4% in 3 years time.
• Analysts expect earnings to reach $70.9 million (and earnings per share of $1.51) by about September 2027, up from $40.1 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 35.5x on those 2027 earnings, down from 36.2x today. This future PE is greater than the current PE for the US Aerospace & Defense industry at 33.4x.
• Analysts expect the number of shares outstanding to grow by 8.04% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.08%, as per the Simply Wall St company report.

Risks

• Cadre Holdings faces potential risks related to cyber security incidents, which could lead to operational disruptions and financial impacts, affecting net sales and earnings as evidenced by the expected financial impact of a cyber incident in their guidance.
  
• The company's reliance on favorable macro trends and public safety spending to drive demand for their products could be a risk if these trends shift, leading to possible variability in revenue.
  
• Heavy reliance on acquisitions for growth carries execution risk and might impact net margins and earnings if the integration of acquired companies does not meet expectations or fails to achieve synergies.
  
• Cadre's financial performance is subject to fluctuations in law enforcement, military, and nuclear market demands, which could affect revenue if these sectors face budgetary constraints or shifts in spending priorities.
  
• Margins may be impacted by the amortization of inventory step-up and intangibles related to acquisitions, indicating a risk to net margins if these costs are higher than anticipated or if the acquired assets do not provide the expected value.

Valuation

• The analysts have a consensus price target of $41.43 for Cadre Holdings 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 $48.0, and the most bearish reporting a price target of just $35.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $683.2 million, earnings will come to $70.9 million, and it would be trading on a PE ratio of 35.5x, assuming you use a discount rate of 6.1%.
  
• Given the current share price of $35.77, the analyst's price target of $41.43 is 13.7% 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.