- Shrinking number of public companies in the U.S. limits the playing field for individual investors and frustrates participation in the big ideas that create value.
- Acquisition holding company focused on lower-middle market and with a publicly traded stock that offers the liquidity and transparency individual investors need.
- Deep bench of experienced deal makers and operators ensure disciplined adherence to selection criteria and skilled portfolio management.
- Pending acquisition could add as estimated $36 million in revenue and $11 million in net income in the year 2025.
- Favorable financial performance comparisons in the next few quarters could trigger new interest in EFSH shares, increasing trading volume and share price.
The Opportunity
The number of publicly-held companies in the U.S. has been in decline over the past two decades, as more and more operations stay private longer, sell to strategic buyer, or team up with a private equity firm. The trend is leaving individual investors fewer choices in tradeable stocks. Furthermore, many of the companies shunning the public markets exhibit the level of strong growth and plump profits that drive worth. Equity investors are left on the sidelines to salivate over value creation just out of reach.
A stake in 1847 Holdings LLC (EFSH: NYSE) is an alternative. The Company takes controlling interest in private companies doing business in North America. The Company’s seasoned leadership team has formulated selection criteria and operational practices to build and capture exceptional returns in its portfolio - returns that can be passed along to stakeholders. More importantly, as a public company with common stock listed on the New York Stock Exchange, 1847 Holdings gives the individual investor full liquidity and transparency.
Investment Focus
Above all else, 1847 leadership is strict in seeking out investment options that will deliver value to its acquisition portfolio. The group is not afraid of smaller operations with annual revenue as low as $5 million, but growth and profits are essential. Historical growth should be at least 5% annually and cash earnings should be at least $1.5 million.
The criteria train 1847’s corporate eye on acquisition targets in the lower segment of the middle market, that is those with enterprise value below $50 million. Majority ownership is the objective. Nonetheless, owners are well motivated to strike a deal with 1847 Holdings because inspired deal structures give sellers liquidity while allowing them to remain in operational control of their business.
The leadership team at 1847 Holdings is well qualified to execute on investment strategies, with decades of collective experience in finance, deal making and operations. Recent transactions help illustrate how 1847 Holdings builds and manages its acquisition portfolio.
Pending Deal
1847 Holding has agreed to acquire CMD Companies, a Las Vegas-based manufacturer of millwork, cabinetry and doors. Preliminarily valued at $18.75 million, the deal is expected to close in the first week of December 2024. CMD management plans to remain on board to help direct the operation’s next leg of growth. If needed, 1847 Holding could make additional capital investment in CMD.
CMD may be generating its own investment capital. The operation reported $33.1 million in revenue in the trailing twelve months ending September 2024, providing $10.4 million in net income. While cash flow details have not been disclosed as yet, it appears likely CMD is cash flow positive.
1847 Holdings leadership is buoyant about the potential to accelerate growth in CMD. The team plans an injection of management processes that create efficiency and lower operating expenses and may arrange cost-saving supply alternatives for raw materials.
Portfolio Synergies
CMD could also get a boost from synergies within the 1847 Holdings portfolio, which currently is composed of companies in two segments: construction and automotive.
The construction segment is currently populated by two operations: Kyle’s Custom Wood Shop located in Boise, Idaho and Innovative Cabinets located in Reno, Nevada. The two operations design, manufacture and install cabinets and countertops for all areas of the home or business. Usual customers are large homebuilders and homeowners in the upper northwest market. Finished carpentry can be highly competitive, but Kyle’s and Innovative have high customer retention records through excellent craftsmanship and application of technology to design.
Kyle’s also has strong raw materials supplier sources. The various relationships could be leveraged to help CMD lower material costs for some of its requirements.
The automotive segment is comprised of one holding, the Wolo Group, a supplier of horn and safety products such as warning lights, sirens and alarms to original equipment manufacturers, retailers and the automotive aftermarket. Horn demand arises from heavy duty trucks, marine and industrial vehicles. Warning lights are used for emergency vehicles, road safety and snow plowing vehicles and construction equipment.
1847 Holdings leadership estimates it can find strong acquisition targets and pay between 3.0 times and 6.0 times cash earnings as measured by EBITDA (earnings before interest taxes depreciation and amortization). Aggregated with other portfolio holdings, the incremental additions of each acquired operation could be valued at a higher EBITDA multiple accorded the holding company. For example, the enterprise value of one of the most well-known holding companies, Berkshire Hathaway, is currently priced near 7.0 times EBITDA.
Sale of operations is an alternative to capturing investment returns. With successful strategic pruning and trimming that result in growth and profit expansion, the Company could resell its holdings for a capital gain. Indeed, 1847 Holdings recently announced the divestiture of one of its construction segment operations.
In late September 2024, the Company completed the sale of High Mountain Door & Trim, a provider of finished carpentry products and services located in Reno, Nevada. Originally acquired in October 2021, High Mountain was sold to a strategic buyer for $17.0 million, or approximately 6.1 times adjusted EBITDA. 1847 Holdings leadership is particularly pleased that the sale price is almost twice the estimated purchase price paid just three years earlier.
Missteps
Not every deal has met with the same success.
In May 2020, 1847 Holdings acquired Asien’s Appliance based in Sonoma County, California. Unfortunately, the deal was closed during the peak of the COVID 19 pandemic. Limits on travel and personal interactions during the early months of the pandemic negatively impacted Asien’s sales and marketing efforts. Furthermore, consumers were in crisis mode, foregoing appliance purchases until economic circumstances stabilized. Ultimately, Asien’s assets were assigned to creditors, triggering a net gain of $1.1 million reported in the first quarter 2024.
In February 2023, 1847 Holdings acquired ICU Eyewear. With time it became apparent that ICU’s inventory had been misrepresented. 1847 leadership had relied on reports from an auditor, which had failed to complete the required physical inventory analysis. In August 2024, ICU’s assets were sold for $4.3 million to retire debt used to finance the acquisition.
If nothing else, leadership has demonstrated a resolve to meet adverse outcomes with solutions that protect the reputation of 1847 Holdings as a trustworthy partner. In both cases, the interests of creditors were protected.
Financial Profile Getting a Makeover
If 1847 Holdings leadership is successful in closing the acquisition of CDM Companies as planned in early December 2024, the revenue and earnings profile of the Company will change dramatically. Current operations are not yet delivering profits, but CDM Companies is a money maker.
Continuing Operations. In the nine months ending September 2024, 1847 Holdings reported $12.4 million in revenue from continuing operations, compared to $11.7 million in the same period in the previous year. The net operating loss was $8.6 million in the first nine months of 2024, compared to a loss of $3.0 million in the previous year. These figures reflect the dispositions of Asian’s and ICU Eyewear operations earlier in 2024 as well as the sale of High Mountain Door & Trim in late September 2024.
CDM Companies. The deal announcement disclosed sales and earnings figures for CDM Companies. In the twelve months ending September 2024, CDM recognized a total of $33.1 million in sales tickets, providing $10.4 million in net income. Sales in calendar year 2023, were $29.4 million, suggesting CDM is growing at about 10% to 12%. The figures also suggest profit margins are expanding, although no details have been provided on the impact of non-operating items on net income.
The table below illustrates one scenario for the sea change ahead for 1847 Holdings. Assuming CDM keeps pace with recent growth, it could add $36.0 million to the Company’s top-line in 2025, bringing total revenue in the construction segment to an estimated $50.0 million. If CDM remains as profitable as recent months, it could add as much as $11.0 million to the bottom line. Assuming no change in the current operations of 1847 Holdings, CDM’s contribution could flip the year 2025 to break even or a small profit.
Capital Resources, Happy Creditors
1847 Holdings finances its portfolio acquisitions with a mix of internal cash flows, equity issuance and debt financings. After paying down debt related to the original acquisition, the balance of net proceeds from the sale of High Mountain Door & Trim will be redeployed to the next acquisition.
1847 Holdings appears to be getting a strong endorsement of their model from two creditors, who have opted to rollover notes payable in order to participate in the next deal. Two creditors have elected to forego repayment if the Company is successful in closing another acquisition in the near-term, ostensibly the planned acquisition of CDM Companies. At the end of September 2024, the Company held $8.7 million repayment in restricted cash in anticipation of the deal closing by early December 2024.
Debt paydown has also been aided by the issuance of common stock in late October 2024. A total of 587,301 million shares of common stock and warrants were issued at $18.90 per unit to provide the Company with net proceeds of approximately $9.9 million. Management has indicated plans to use as much as $6.9 million of the offering proceeds to retire debt.
Indeed, leadership intends to keep leverage under control, limiting debt levels to 1.25 times EBITDA. While the test cannot be applied presently given that trailing EBITDA is negative, management is already aiming for leverage reduction.
Long-term debt composed of note payable and convertible notes totaled $34.8 million at the end of September 2024. Subsequent to the quarter end, debt was retired related to the High Mountain acquisition as well as other debt obligations. Based on disclosures in the recent third quarter report and management’s guidance, we believe total convertible notes and notes payable at mid-November 2024, was approximately $26.6 million.
Flotation, Dilution and Other Frustrations
The common stock offering in November 2024 also provided a badly needed boost to EFSH share flotation, following a series of reverse stock splits that have chipped away at tradeable shares. In addition to selling 587,301 common shares the Company issued pre-funded warrants, with each unit consisting of warrants to purchase three shares of common stock. Subsequent to the offering, certain warrants were exercised giving rise to the issuance of an additional 15.8 million shares. Total shares outstanding are now 16.4 million, significantly increasing the constructive float.
The downside of share and warrant issuance is future dilution. In addition to recently issued warrants that remain outstanding, the Company has four series of preferred stock, all of which are convertible into common stock.
We also note the fairly wide bid-ask spread that is approximately 4% of the bid price. The circumstance can mean immediate loss of capital to investors taking long positions in EFSH.
Homework the Dog May Not Eat
A long position in 1847 Holdings could be quite lucrative, but requires some careful research. First, the Company may be classified as a publicly traded partnership for federal tax purposes and may not pay federal taxes. Stakeholders will be responsible for taxes on income whether paid out or retained. The company will provide a report at year-end on each shareholder’s obligation.
Second, 1847 Holdings’ structure might seem complicated with multiple boxes in an organization chart provided in management’s disclosures. Indeed, a description of the company’s ‘manager’ requires investors to weed through a lengthy explanation of the manager’s role in building and running the acquisition portfolio.
Third, acquisitions can involve some fancy financial structuring among sellers, lenders and equity investors. Not a heavy lift for management given the teams extensive finance experience and skills in crafting deals that get closed. However, individual investors might need an extra beverage to wade through deal descriptions and disclosures in quarter and annual reports.
Deep Value for Risk Tolerant Investors
In our view, the stock is current trading at a significant discount to its intrinsic value based on current operations and the pending acquisition of CMD Companies. We estimate revenue in 2025 could reach $55.0 million, bringing the bottom line to break even or a small profit. A multiple of one times forward revenue suggests an intrinsic value near $3.35 per current share.
For all the progress leadership has made in building a strong portfolio, 1847 Holdings stock remains a largely unnoticed. Financial platforms commonly used by investors for due diligence are still displaying dated information on balance sheet resources and shares outstanding. Investors may need time to absorb the implications of recent cash infusions from the sale of portfolio assets and the common stock offering. It also may require a couple of financial reports to make clear the boost the CMD acquisition could give to sales and earnings.
Herein lies the opportunity for the early bird who is prepared to do their research and wait patiently - at a steep discount, a stake in fast growing, profitable operations usually accessible only to private equity firms or strategic investors.
Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.
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