CDRE - Cadre Holdings: Safety Equipment Provider Does Not Fit My Cadre

2023-08-01 18:00:15 ET

Summary

• Cadre Holdings, Inc. offers safe equipment solutions to various agencies.
• The company looks like a decent player, but valuations have been more than fair soon after the IPO in 2021.
• With earnings power lagging, in part, because of dilution in the share count, I am too cautious to get involved, with earnings power not sufficient to create appeal here.

In March of last year, I believed that shares of Cadre Holdings, Inc. ( CDRE ) looked fairly valued after it has seen a successful public offering in the year before. The safety equipment provider saw a big rally at the time of the IPO as shares have quickly re-rated to rather fair valuation levels.

Over the past year, Cadre Holdings, Inc. has struggled along as some growth has been seen (driven by a bolt-on deal), yet I fail to see appeal as earnings are not coming in (let alone surpass) the $1 earnings per share mark. All of this leaves me with a cautious stance here.

Safe Solutions

Cadre is a manufacturer and distributor of survivability and safety equipment, typically used by first responders. Typical products to think of include body armor, explosive ordnance equipment, duty gear and other products, sold directly and through indirect channels. The company offers a one-stop solution for its clients by furthermore offering products like uniforms, boots, and ammunition.

Customers of the company include the U.S. state, local agencies, federal agencies, as well as other commercial customers and international clients, in a market which is as large as a trillion dollars across the globe. Continued technological advancements, and more stringent requirements, make that these products often need to be replaced, as safety and security continue to play a vital role.

The company went public at $13 per share in November 2021, as 33 million shares granted the business a $430 million equity valuation, or $580 million enterprise valuation once net debt of $150 million was included. With sales seen around $420 million in 2019, on which operating profit of $27 million was reported, I pegged earnings potential at just $0.55 per share.

2020 was a strange year, with sales down to $405 million, yet operating earnings nearly doubled to $50 million, partially aided by a one-time gain of $11 million, as earnings came in around a dollar per share. Revenues were up 17% to $225 million in the first half of 2021, with operating profits reported at $30 million, which annualized would work down to an earnings number of around $1.30 per share, translating into an attractive multiple at the offer price.

This appeal was rapidly diminished as shares rose to $20 on the first day of trading, as preliminary third quarter sales of $98 million actually were down year-over-year, reducing the expected earnings run rate to about a dollar per share. The combination of higher expectations and lower earnings multiple made me not upbeat at $20, levels at which shares traded at 20 times earnings, while leverage came in around 2.5 times EBITDA.

What Happened?

After voicing a somewhat cautious stance at $23 in March 2022, shares have been trading rangebound between $16 and $32 since that point in time, now trading at $23 per share.

2021 revenues rose by roughly 5% to $427 million as operating profits rose from $50 million to $52 million. That is, however, after 2021 earnings were boosted by an $11 million one-time gain, revealing solid underlying trends. The company guided for flattish sales between $434 and $441 million in 2022, with adjusted EBITDA seen largely flattish between $70 and $75 million. Based on this metric, and an estimated $15 million in D&A expenses, I pegged earning power around $1.25 per share,

In May 2022, Cadre announced a bolt-on deal for Cyalume Technologies, a supplier of chemical illumination solutions in a deal set to add $25 million in sales, while no purchase price has been announced at the time. The closing document revealed that $35 million was paid, resulting in a somewhat higher sales multiple.

By March of this year, the company reported full year sales at $458 million, ahead of the guidance provided at the start of the year, although Cyalume, of course, made a contribution to the full year results. The issue is that GAAP operating profits of $17 million worked down to net earnings of less than $6 million, with earnings reported at $0.16 per share.

A big part of the GAAP numbers being down is due to a $32 million stock-based compensation expense which raised some real eyebrows as EBITDA came in at $75.7 million (on an adjusted basis), with net debt down to $104 million despite the bolt-on deal.

For 2023 the company guided for sales between $463 and $493 million, with EBITDA seen between $76 and $82 million, indicating modest growth in all likelihood. In May, Cadre posted first quarter sales of nearly $112 million, up 7% on the year before. This looks solid, but the results benefit from the easy comparisons with Cyalume not contributing in the first quarter of 2022. Operating earnings normalized at $11 million, for an earnings number of $7 million, or $0.19 per share amidst a continued increase in the share base.

What Now?

While leverage has come down to just over one times EBITDA and growth is modest, I am somewhat surprised by the increased share count and the fact that earnings power does not look like structurally approaching, or even exceeding, a dollar per share.

This makes me quite cautious to be involved with the stock, still carrying a $23 handle. This is mostly as I cannot explain the increase in the share count which seems related to secondary offerings. After all, CEO Mr. Warren Kanders (who furthermore is the Chairman of the business), sold 1.5 million shares at $19 through a related entity as recent as May.

Given this backdrop, I am a bit cautious here, as management has some need to deliver here, as I see no reason to get involved with the shares here.

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