When Cadre Holdings (NYSE:CDRE) went public in November of last year, I concluded that the company looked like a safe safety provider. Shares rallied 50% from the offer price, as that has been a sizeable move but still resulted in reasonable valuations. Since the IPO, shares have gained another 25% as operating performance has been largely in line with expectations, resulting in quite a re-rating of the valuation. Shares now trade at levels at which I consider shares to be largely fairly valued here, yet with few imminent triggers in sight.
Cadre is a global manufacturer and distributor of safety and survivability equipment which is used by first responders. Founded some 55 years ago, the company has been offering critical protection for users to perform their functions safely.
Products include body armor, explosive ordnance disposal equipment, duty gear, and other products which are sold directly and through indirect channels. The company offers a one-stop solution for such equipment, as it furthermore sells uniforms, boots, ammunition and other ¨common¨ products as well.
The company operates quite a diverse operation, having many customers which are spread out between US state, local agencies, federal agencies, commercial customers and international clients. The total addressable market for such soft body armor totals nearly a trillion across the globe, with adjacent markets pushing up the opportunity to much larger numbers. Technological advancement and low life expectancy of these products drive this opportunity with safety being paramount, as that was already ahead of the Ukraine war.
The company went public at $13 per share as 33 million shares outstanding valued equity at around $430 million at the offer price, albeit that this valuation still included a near $150 million net debt load. This $580 million valuation was applied to a business which generated $420 million in 2019 on which a $27 million operating profit was reported. Based on 3% debt costs and a 20% tax rate, I pegged earnings power at $0.55 per share.
Revenues fell slightly to $405 million in 2020, offset by very strong margin performance as operating earnings nearly doubled to $50 million, as that results in earnings power close to a dollar per share. Truth be said, operating profits received a one-time boost to the tune of $11 million thanks to other income. Revenues rose 17% to $225 million in the first half of 2021, as operating profits came in at $30 million, quite impressive. If we annualise this, I saw a business with $450 million in sales, $60 million in operating earnings, and earnings close to $1.30 per share, as this translated into a compelling valuation at the IPO price of $13 per share.
This appeal was killed for two reasons. For starters is that shares rallied to $20 on the first day of trading, pushing up multiples to 15 times. Furthermore, third quarter preliminary results revealed revenues of $98 million, down from $106 million in the year before, with EBITDA seen flattish at $15 million. This would cut earnings power to around $1 per share, as this $20 stock and 2.5 times leverage ratio made that I turned neutral on the shares on day one.
In the first couple of months since the public offering, shares of Cadre have been trading in a $15-$25 range, currently trending at the higher end of the range.
Early in December, the company posted third quarter results which were in line with the preliminary third quarter results revealed at the time of the offering. Toward the end of the year, the company announced the purchase of Radar Leather Division S.r.l., an Italian business, with no financial details announced related to this deal.
Early in March, the company posted its fourth quarter and full year results for 2021. The company reported fourth quarter revenues of $103.5 million, down 4% on the year before, as full year revenues rose modestly to $427 million. Quarterly operating profits of $9 million and change were unchanged from the year before but rose modestly to $52 million for the year. In the meantime, net debt has been cut to $125 million.
Based on reported operating income of $52 million, I peg realistic earnings potential at $38 million, just over a dollar per share, but the run rate is actually trailing the $1 per share mark based on the most recent quarterly performance. For 2022, the company outlined a guidance which called for very modest revenue growth, with sales seen between $434 million and $441 million. EBITDA is seen between $70 million and $75 million, comparing to $71 million and change in 2021.
If we use this EBITDA estimate, reduce it by $15 million in D&A expenses, $5 million in other expenses, a couple of millions in interest expenses and taxes, earnings power should still come in around $40 million, or close to $1.25 per share. This works down to 20 times earnings multiple, with net debt comfortably below the 2 times mark.
Despite somewhat challenging results in the third and fourth quarter, it seems evident that the 2022 guidance calls for stabilization. This results in realistic earnings power close to $1.25 per share as improved earnings and IPO proceeds have killed any debt overhang.
All of this looks quite compelling, but the move from $20 on day 1 to $25 here has completed the re-rating in terms of the valuation, with shares trading at a full and fair 20 times earnings multiple. Hence, I can only conclude that I see fair value here, with no imminent triggers in sight to alter this neutral stance.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.