CDRE - Cadre Holdings: Value Following The Selloff

2023-03-18 03:14:10 ET

Summary

• CDRE reported mixed Q4 earnings, marked by an improvement compared to the first half of the year, but some softer year-ahead guidance.
• The stock has been under pressure although solid fundamentals may limit further downside.
• We see room for CDRE to rebound based on some compelling value for an industry leader with a positive long-term outlook.

Cadre Holdings Inc (CDRE) is recognized in the law enforcement industry as a manufacturer of safety and body protection equipment for first responders. While an ongoing theme of increasing police budgets has supported steady growth, the challenge in 2022 was supply chain disruptions pressuring margins and earnings. The company just reported its latest quarterly result, highlighted by mixed trends but an overall improvement compared to the first half of last year.

There's plenty to like about CDRE as a segment leader with consistent profitability and even a regular quarterly dividend that yields 1.6%. Shares have been volatile amid a softer growth outlook although we view the recent selloff as a buying opportunity. A positive long-term outlook at a reset valuation can support a rebound in the stock going forward.

CDRE Earnings Recap

CDRE reported Q4 GAAP EPS of $0.17, which climbed from $0.13 in the period last year but missed the consensus estimates by $0.03 this quarter. Net sales of $124 million, were up 20% year-over-year and came in above estimates.

The story this quarter was an improvement in inventory availability and shipments along with a boost from higher pricing initiatives. The adjusted EBITDA margin at 18.1% climbed from 14.7% in the period last year and was also a ramp higher compared to the full-year 2022 result at 16.5%. By this measure, CDRE ended the year on a strong note driven by solid demand for its products including armor, duty gear, and crowd control solutions.

On the other hand, guidance came in soft which explains some of the weakness in the stock that sold off sharply on the earnings release. Management expects 2023 sales between $463 and $493 million, representing an annual growth rate of just 4.4%. This is below prior consensus estimates looking for a figure closer to $500 million. Similarly, the forecast for adjusted EBITDA to approach $80 million is just slightly higher than the $76 million result in 2022.

That being said, management maintained a positive tone during the earnings conference call , citing the timing of its Capex cycle but still expecting growth to rebound by the second half of the year.

Finally, we can mention CDRE ended the year with $45 million in cash and equivalents against $137 million in long-term debt. A net leverage ratio under 1x highlights the solid balance sheet position. This works into the company strategy to seek attractive acquisitions as part of its long-term roadmap.

Is CDRE A Good Stock

Cadre Holdings is well-positioned to capture several market growth drivers. First, the "American Rescue Plan" legislation from 2020 provides upward of $350 billion in resources over the next decade in support of law enforcement.

At the same, one of the themes the company has discussed is that police departments across the U.S. as still facing issues with recruitment which has translated into a slow buildup of executing on those resources. Favorably, spending per police officer has climbed in recent years which represents a tailwind as law enforcement agencies add to headcount and utilize their expanded budgets.

Keep in mind that Cadre also has a large opportunity internationally, where 2022 sales represented approximately 22% of the overall business. The understanding is that NATO countries, in particular, are still behind the curve in terms of defense and security spending in terms of GDP relative to the U.S.. One thought is that the current events in Eastern Europe will speed up the urgency to improve preparedness as a growth runway for Cadre.

So when we look at the "law enforcement" suppliers landscape, it's one market segment that benefits from structural tailwinds. We'll note that CDRE trading at a 10x EV to forward EBITDA multiple is at a large discount to a peer group we can include Axon Enterprise Inc ( AXON ), Kratos Defense & Security Solutions Inc ( KTOS ), ShotSpotter Inc ( SSTI ), and Digital Ally Inc ( DGLY ).

Keep in mind that each of these companies specializes in different areas, some being more on the "tech" side. The stronger growth in recent years in many ways with AXON for example generating a 54% y/y/ revenue increase in its last quarter help to justify the premium

Still, CDRE stands out as something of a "value pick" in the group, particularly considering its 1.7% yield, while most companies do not distribute a regular dividend. In our view, there is room for the valuation spread to narrow with CDRE trending higher and converging with the attraction of the stock being its steady growth profile and room for earnings to reaccelerate getting into 2024 and beyond.

CDRE Stock Price Forecast

We rate CDRE as a buy with a price target for the year ahead at $24.00 representing a 12.5x EV multiple on management's 2023 adjusted EBITDA guidance of around $80 million. Notably, this is an area around 25% higher than the current stock price a range CDRE traded at as recently as February indicative of a volatile environment. Ultimately, our sense is that the recent selloff is overdone with the downside limited based on the strong fundamentals and room for the company to outperform expectations.

In terms of risks, a deeper deterioration to the macro environment, leading to weaker sales would open the door for more downside in CDRE. Monitoring points over the next few quarters include the trends in margins and cash flows.

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