CSWI is active in three lines of business:

  • Contractor Solutions is the company's core business (67% of sales). This segment manufactures products for residential and commercial use, notably for HVAC and plumbing applications. These include condensate pumps, steam traps, drainage and evacuation systems, electrical protection, etc.
  • Specialized Reliability Solutions (19% of sales) provides tools to improve the performance of industrial assets. The range is broad and includes specialized lubricants, sealants and desiccant filtration products.
  • Engineered Building Solutions, the smallest business (14% of sales), offers safety solutions for the construction, renovation and modernization sectors. These include architectural railings and metals, perimeter protection, fire protection and elevator solutions.

It manages its three activities separately. Each of the 9 production centers (8 in the USA and the largest in Vietnam) is dedicated to a specific activity. For example, the plant in Vietnam is dedicated to the production of the Contractor Solutions segment. As a result, synergies are fairly limited, especially as profitability differentials between divisions are significant. Contractor Solutions is the most profitable business, with an operating margin of nearly 25%. The other two activities are less profitable, with operating margins below 15%.

Overview of the 3 divisions (source: CSWI)

Competition is fierce in every market. In this sense, despite the differences in profitability, it makes sense to adopt a broad, diversified approach across several activities, especially as companies specializing in a single product range - so-called "pure players" - have historically not been very successful in this sector.

So far, this approach has worked very well. The figures published since 2015 are very good. Revenues have more than doubled (CAGR of 13.1%). In recent years, particularly since the pandemic, CSWI has focused on the expansion and quality of its distribution network. Products are now distributed en masse, whether through professionals or end-users. As a result, stocks are sold out more quickly. This is largely responsible for the sharp rise in margins since 2021. Operating profitability rose from 14.2% to 18.4% last year, and should continue to improve over the next few years.

Also noteworthy in the accounts is the high level of free cash flow - the profit actually available at the end of a financial year - which exceeds net income in most years.(FCF conversion, which translates the conversion of net profit into free cash flow, was 111.5% in 2023).

The balance sheet is also very robust. Debt is well under control, despite a number of acquisitions in recent years. Net debt should represent less than 1 times EBITDA at year-end.

Over the next few years, CSWI should maintain its excellent momentum. Analysts anticipate an operating margin of 22.2% by 2026. However, the valuation is high. On a P/E basis, the company is paying 36.5 times earnings, well above the levels of recent years. What's more, the current price is higher than the average analyst target of EUR 228.

CSWI is a high-quality company. It is very well managed and has implemented a rigorous strategy to conquer niche markets. However, these positive factors do not justify an excessive valuation. We could take advantage of a downturn in the stock, with long-term investment prospects in mind.

CSWI vs S&P500 since the IPO in 2015 (source: Zonebourse)