Carlisle (CSL): Shrinking to grow

Rational capital allocation to create shareholder value

Carlisle started in 1917 as Carlisle Tier and Rubber Company with $4,000 of investment to buy machinery and an outside investment of $30,000 from a New York rubber broker. The company almost went bust in the great depression, because of its struggling customers and high debts. The company survived and eventually went public in the 1960s to pursue acquisitions of highly specialized, technically advanced, high-margin products in the industrial space.

Carlisle website

The company has expanded organically and through M&A to become a large industrial conglomerate through the years. In 2006 the company had $2.6 billion of revenue in 9 more or less adjacent divisions. These diversified platforms were managed with nine distinct business units in a decentralized approach similar to what behemoths like Danaher or Constellation Software have used to great success over the last decades.

Shrinking to grow

After 2006, the company started to focus its portfolio, shedding and combining divisions to arrive at just five business units in 2016 with $3.7 billion in revenue. Carlisle started to do what most companies can’t do: choose the rational decisions to shrink the company. Most companies are governed by the eternal wish to grow into more markets and sectors. However, there is an immense advantage in going up-market. Danaher is the best example, going from a diversified industrial with gross profit margins of around 30% to a focused medical devices/bioprocessing picks and shovels company generating 60% gross margins and 21% EBIT margins. Unlike Danaher, Carlisle hasn’t spun off its divisions but sold them to reinvest the proceeds into its higher-quality business units and move into adjacent markets.

Today, Carlisle is a focused platform and a pure play on construction materials after the sale of its fluid technologies business last year to private equity firm Lone Star Funds for $520 million, a bit under 2 times sales and its interconnect business to Amphenol Corporation (another fantastic business!).

The Building Envelope market

Carlisle focuses on the Building Envelope market and owns just 5% of this $70 billion market, which is expected to grow 5% organically. Of these $70 billion, $30 billion is the current addressable market with the existing product portfolio, and $40 billion represents adjacent opportunities, which can be unlocked via R&D and M&A.

The core Carlisle Construction Materials (CCM) business is the leader in its $19 billion addressable market with around 17% market share and generating 30% AEBITDA margins. This business is almost entirely commercial (92%) and has a high (65%) amount of replace & remodel (R&R) revenue. CCM has been highly resilient through the cycles and has constantly grown and shown operating leverage, as seen below. Roofing generally is a 15-20 year cycle once installed, as roofs need maintenance and replacements eventually. 65% of Carlisle’s products are directly shipped to the job site due to their size, making distribution and service quality a part of the competitive advantage.

Carlisle Weatherproofing Technologies (CWT), including the Henry and recently acquired Insulfoam acquisition, is a more fragmented $14 billion market where Carlisle owns about 9%. The market is split evenly between commercial and residential end markets and has a less favorable mix with 45% R&R and 55% new construction revenue. The fragmented nature makes it a prime target to leverage Carlisle’s M&A playbook, which I’ll get to later.

Both segments benefit from re-roofing demand from the strong new build period in the early 2000s, which will drive R&R through 2030, and ESG tailwinds from energy-efficient construction. 65% of Carlisle’s building product revenues in 2022 were LEED-qualified products. Right now, LEED and STAR-qualified buildings only account for <10% of new commercial buildings in the US.

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