SmartCompliance RFID Cabinets Will Improve Operations, But Cost Pressures May Impact Future Margins

Key Takeaways

• Innovation in SmartCompliance first aid cabinets and expanding market segments drive revenue growth and increase market share.
  
• Productivity initiatives and strategic sourcing responses enhance margins, cost efficiency, and earnings stability.
  
• Acme United faces profitability pressures from macroeconomic challenges, supply chain disruptions, increased SG&A expenses, and sourcing risks amid geopolitical tensions.

Catalysts

Supplies cutting, measuring, first aid, and sharpening products to the school, home, office, hardware, sporting goods, and industrial markets in the United States, Canada, Europe, and internationally.

• Acme United has introduced SmartCompliance first aid cabinets with RFID technology, which allow for automatic replenishment. This innovation is expected to drive consistent and growing revenue from the annuity segment of its business, impacting future revenue growth.
  
• The productivity initiatives undertaken by Acme United, such as cost reduction measures, automation, and new software tools, have resulted in significant annual savings of over $2 million. These improvements are likely to enhance net margins by reducing costs further.
  
• The company has been actively expanding its distribution and product offerings in growing market segments, such as the kitchen and culinary markets with new sharpening tools. This expansion is expected to increase market share and drive revenue growth.
  
• Acme United's strategic responses to tariff challenges, including diversifying its sourcing from countries such as Egypt, Thailand, and India, coupled with domestic production capabilities, aim to mitigate cost impacts. This ability to manage cost pressures is likely to protect its margins and support future earnings stability.
  
• The enhanced capacity at the Rocky Mount distribution center and the facility expansion in Laval, Canada, position the company to handle additional growth efficiently, enabling scalability that is projected to support long-term revenue growth.

Acme United Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Acme United's revenue will grow by 4.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 5.2% today to 3.2% in 3 years time.
• Analysts expect earnings to reach $7.1 million (and earnings per share of $1.82) by about March 2028, down from $10.0 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 40.1x on those 2028 earnings, up from 15.0x today. This future PE is greater than the current PE for the US Commercial Services industry at 30.0x.
• Analysts expect the number of shares outstanding to grow by 2.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.2%, as per the Simply Wall St company report.

Acme United Future Earnings Per Share Growth

Risks

• Acme United faces risks from the challenging global macroeconomic environment, including high inflation, high interest rates, and potential new tariffs, which could impact costs and squeeze net margins.
  
• Supply chain disruptions remain a concern, which may impact the company's ability to maintain consistent supply and potentially affect revenue streams.
  
• The company's reliance on diversification of sourcing to mitigate tariff impacts could involve risks if geopolitical tensions or supply chain challenges arise in alternative sourcing countries, potentially affecting earnings.
  
• A reduction in gross margin from 39.1% to 38.7% in the fourth quarter highlights potential pressures on profitability despite overall sales increases.
  
• Increased selling, general, and administrative (SG&A) expenses as a percent of sales from 31% to 32% could signal ongoing cost pressures impacting net margins and operational profitability.

Valuation

• The analysts have a consensus price target of $58.0 for Acme United based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $219.6 million, earnings will come to $7.1 million, and it would be trading on a PE ratio of 40.1x, assuming you use a discount rate of 7.2%.
• Given the current share price of $40.0, the analyst price target of $58.0 is 31.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.