EFSH: Value Triggers in Acquisition Strategy

 Successful divestiture of non-performing assets 

 Monetization of operations at premium valuation metric 

 New capital through both public and private equity offerings

 Acquisition of strategic operation at deep value 

 Anticipated shift to net profitability in current year

Unique as a public manager of an acquisition portfolio, 1847 Holdings (EFSH:  NYSE) is building a collection of strategic operations.  We were first introduced to the Company in November 2024, when leadership had just announced an agreement to acquire CMD, Inc., a cabinetry, millwork and door manufacturer, at a compelling purchase price.  Growing and profitable, the cabinet maker showed promise to revamp the Company’s financial profile.  

Recently, we checked in with the 1847 team to catch up on the Company’s progress over the last four months since we first concluded the stock was trading at a deep discount to its portfolio.  Besides closing on the CMD acquisition, management has taken other actions lend to the Company’s worth.  Fundamental developments held up against the current price in the mid-teens, the stock still appears remarkably undervalued.  Investors looking for a bargain would do well to review the most recent advances.

Tidying up Balance Sheet with Asset Sales

Divestiture of the ICU Eyewear business was accomplished in August 2024, eliminating $4.2 million in long-term debt from the Company’s balance sheet.  The action also freed management from the burden of dealing with a problematic portfolio asset that had ended up in default on its liabilities.  The lender accepted a cash bid of $4.25 million for ICU’s assets and struck the debt.  

Just one month later in September 2024, 1847 Holdings management agreed to an entirely different offer  -  one that put cash into the Company’s bank account.  High Mountain Door & Trim, originally acquired in 2021 for $7.9 million, was sold for $17 million in cash to a strategic buyer.  Understandably, the team points to the High Mountain case as proof the business model is working:    1) a double in value in three years and 2) excess cash proceeds after paying down debt to reinvest in new deals.

Equity Raises Bring in New Capital

The two deals did result in lower total debt and higher cash balances, but new capital is needed to strike timely acquisitions.  Before the close of 2024, the Company completed two capital raises totaling $20.5 million in net proceeds.  In late October 2024, the Company raised an estimated $10.0 million by selling in a public offering 8.8 million units at $1.26 each (one common share or one prefunded common stock warrant and two additional common stock warrants).  Then in December 2024, the Company raised $10.4 million in net proceeds through the private placement of 42.3 million units (one common share and one pre-funded common stock warrant and two additional warrants).  

The prospect of dilution from such capital raising activity might cause a glaze over the eyes of some investors.  Us too!  That said, we point to the recent success in monetizing asset value in the acquisition portfolio with an impressive capital gain.  Second, we note the recently completed acquisition of CMD at a deep-value multiple of two times cash earnings.  If the team continues to execute with similar success, returns on invested capital should be compelling.        

The New Black is a Black Bottom Line

With the deal completed in December 2024, the CMD operation will begin contributing to 1847 Holdings financial results in the first quarter ending March 2025.  While the Company has not released detailed and audited financial results for CMD it has been disclosed that the operation realized approximately $10.4 million in operating income on $33.1 million in net sales during the twelve months ending October 2024.    Approximately two thirds of sales are doors and trim millwork, which are marketed and installed by CMD, and about one third of sales are cabinets manufactured by CMD.  The operation complements other portfolio operations such as Kyle’s Custom Wood Shop and Innovative Cabinets and Design.  It is a plus that the CMD founder will remain with the operation for two years in the role of business development.

                        Source:  CMDNV.COM

Three months since closing, 1847 Holdings leadership speaks with enthusiasm for the CMD deal.  Indeed, the team is even more confident in CMD’s potential contribution to financial results.  CMD has $35 million in contracted business in its pipeline.  Another $40 million to $50 million in potential business is represented by bidding activity.  There is also growth potential in expanding to new markets.  Historically, tract home construction has accounted for only 10% of CMD's business even though this segment of the residential housing market is fast growing in CMD’s home market in Nevada.    

In 2025, the CMD operation is expected to add $45.0 million to revenue and $1.3 million to operating income.  Thus, 1847 Holdings is expected to flip to net profitability for the first time in 2025.  In the full year 2026, the contribution is expected to be $60.0 million at the topline and $5.0 million to income.  

More Changes Coming for Acquisition Portfolio

Each of these developments have had favorable impact on 1847 Holdings financial performance and balance sheet strength.  Unfortunately, over the last six months the stock has continued to trade in a slow, but steady downtrend.  Perhaps investors are simply waiting for the next announcement.

Indeed, investors can expect more deal news.  The Company has already engaged advisors to sell another portfolio asset, the horn and safety products producer Wolo Manufacturing Company.  It is a small operation and no longer complementary to the rest of the portfolio that is largely involved in construction.

There could be additions to the portfolio.  The CMD acquisition has whetted leadership’s appetite for capturing another profitable company.  The team is still targeting operations with $5.0 million or more in cash earnings (earnings before interest, depreciation and amortization or EBITDA).  The team is willing to pay as much as four- or five-times EBITDA, especially if the target is complementary to other holdings in the portfolio.  However, the team has thrown up one more hurdle.  An efficiency metric, the allocated cost of owning the operation will also be considered.  

News of the High Mountain sale and CMD acquisition may not have impressed stock investors, but deal makers have apparently taken note.  The team at 1847 Holdings acknowledges phone calls and e-mail overtures coming in with new ideas.  Although the team had originally set the year 2025 aside to digest the CMD transaction, their acquisition fingers appear to be twitching again.       

Calendar Ahead

For investors who need the comfort of financial reports to take long positions, 1847 Holdings is expected to release year-end 2024 financial results in the next few weeks.  We expect the year-end 2024 report to reflect the favorable impact of capital infusions and debt payoffs on the Company’s balance sheet.   Then, by mid-May 2024, the first quarter 2025 report is expected to disclose the first full quarter contribution from CMD.  We expect the quarter report to enable for the first time the calculation of a forward price-earnings multiple  -  a number we believe could be compelling.   

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