Given the high cost of home repairs and maintenance, many homeowners have become do-it-yourselfers. During my own trips to the hardware store, I have become familiar with a company called Hillman Solutions Corp. (HLMN, Financial), which stocks many shelves at big-box home improvement stores. There are thousands of fiddly little parts which have to be managed at these retailers, a very labor- and time-intensive task.
Based in Cincinnati, Hillman supplies hardware and home improvement products as well as provides key duplication services to 42,000 retailers in North America. Founded in 1964, it became a public company in July 2021 via a combination with special purpose acquisition company Landcadia Holdings III, debuting at a price of $11.99.
Currently, the stock is trading slightly above $9 per share with a market capitalization of $1.8 billion.
Hillman operates through three distinct segments: Hardware and Protective Solutions (HPS), Robotics and Digital Solutions (RDS) and Canada.
The HPS segment deals in fasteners, builders' hardware, personal protection products and work gear. The RDS segment provides software-driven solutions for robotic key duplication and engraving. Meanwhile, the Canada segment distributes fasteners, hardware items, keys, key duplicating systems and identification items to various distributors.
This is what Hillman's income statement looked like in 2021.
Hillman Solutions earns 90% of its revenue from its own branded products. The company has consistently grown its top line in 56 out of 57 years in business, establishing a competitive advantage. Hillman's management projects it can achieve 15% growth in Ebitda and 10% revenue growth over the long term.
Some of the company's main clients include The Home Depot Inc. (HD, Financial), Lowe's Companies Inc. (LOW, Financial), Ace Hardware and Walmart Inc. (WMT, Financial), which accounted for 27%, 21%, 11%, and 7% of its fiscal 2021 sales. Hillman manages a total of 112,000 stock-keeping units across 22 distribution centers and has a field sales and service team that assists with in-store setup and stocking services, freeing up clients to focus on other matters. This enables Hillman to bypass customer distribution centers and provide a speedy and cost-effective product-to-shelf service, which is likely why it has received multiple vendor of the year awards.
A "moaty" business model
Hillman's primary competitive advantage lies in its high-touch service business model, which includes direct shipping to stores and employees stocking customer shelves. This ensures high fill rates and an organized product display and presentation. The in-store service presence creates a competitive advantage, making it difficult for retailers to switch suppliers.
More than 60% of Hillman's products are consumables. Its focus on consumable products is attractive to customers as they represent a small portion of the total project cost. Its business is primarily tied to the steady repair, remodel and maintenance market, rather than the cyclical new home construction market. This demand is supported by factors such as home price appreciation, healthy disposable income levels and an aging housing stock that requires more repair and maintenance.
Its Robotics and Digital Solutions business, which accounts for approximately 20% of sales, offers in-store kiosks for key duplication, ID tag engraving and knife sharpening. Its employees maintain and service the equipment, creating a barrier to entry for competitors once it has been installed.
Further, the sales service employees work in coordination with the retailers' personnel to ensure well-stocked and organized fastener and hardware bins, creating a competitive advantage that even large retailers like Home Depot find difficult to overcome.
Valuation
While Hillman was in business for 55 years before going public, it does not have a long operating history as a public company.
Looking at the following chart, which breaks down the quarterly operating cash flow, I note there have been large changes in Hillman's working capital quarter to quarter (which are likely exaggerated due to the pandemic). Therefore, to get a reasonable sense of free cash flow, we have to deduct the changes to working capital from free cash flow. This gives us the core fee cash flow, represented by the orange line.
Hillman is still not yet consistently profitable on a GAAP basis (red and green bars in the chart above) and also has inconsistent free cash flow. My optimistic estimate is that the company produces about $50 million of free cash flow per year on a current market cap of about $1.8 billion. This gives me a price-to-free cash flow ratio of over 36. This is pricey for a company that has yet to demonstrate a consistent track record of growth.
On an enterprise value/Ebitda basis, things look a little better. However, I do not discern a margin of safety here with respect to the ratios of comparable companies.
| Ticker | Company | PS Ratio | Price-to-Operating-Cash-Flow | EV-to-EBITDA | EV-to-Forward-EBITDA |
| HLMN | Hillman Solutions Corp. | 1.22 | 31.44 | 16.46 | 12.42 |
| HD | The Home Depot Inc. | 2.07 | 24.72 | 13.65 | 13.85 |
| LOW | Lowe's Companies Inc. | 1.41 | 14.86 | 13.08 | 11.59 |
| FBIN | Fortune Brands Innovations Inc. | 1.05 | 15.35 | 8.88 | 11.87 |
| MBC | MasterBrand Inc. | 1.69 | 8.48 | 19.16 |
Hillman’s balance sheet is leveraged with total debt of around $960 million and a debt-to-equity ratio of 0.84. In a recessionary environment, the company could struggle as customers postpone home renovation projects.
Conclusion
Hillman Solutions does have a moat given its high touch service-oriented distribution model. However, it has a short operating history and the valuation ratios do not show any margin of safety. In addition, I am not able to get a good idea of the growth in the business due to the short track record.
Therefore, I will be putting the stock on my watchlist for now.
