On Mar 8, we downgraded our recommendation on Raven Industries Inc. from Neutral to Underperform. This industrial manufacturer of products for the agricultural, industrial, construction and military/aerospace markets witnessed the downgrade on the back of tepid fourth quarter outlook due to continued macro weakness related to energy exploration and defense spending and continued headwinds for Raven’s segments.
Why the Downgrade?
Raven’s third-quarter 2013 sales increased 4% to $97 million while earnings declined 3% to 31 cents per share, pulled down by weak energy and agricultural sales. Both fell short of the respective Zacks Consensus Estimates.
The Aerostar segment will continue to be impacted by sluggish aerostat orders in the near term. Aerostar is subject to federal spending and new opportunities in tethered aerostats to provide cost-effective persistent surveillance for the military and border security are critical to Aerostar's success. Even though Aerostar's protective wear, military parachute and high altitude research balloon operations have been successful, the segment’s results will continue to be affected in the absence of additional aerostat or smart sensing radar system orders in Vista.
Revenues at the Engineered Films segment will remain affected due to continued weakness in energy market, which accounts for around 40% to 50% of the segment’s sales. Margins in the Applied Technology segment will be under pressure due to the company‘s increased investments in new initiatives. Given the performance so far in the year and mixed fourth-quarter outlook, the company's long-term earnings growth target of 10-15% seems a distant possibility in the current year.
Raven is set to report fourth-quarter 2013 results tomorrow, Mar 12. The Zacks Consensus Estimate for the fourth quarter has slipped 19% to 25 cents over the last 60 days, reflecting a 16.7% year-over-year decline. For fiscal 2013, the Zacks Consensus Estimate has dipped 4% to $1.39 per share, depicting a 0.36% annual growth.
Other Stocks to Consider
Raven currently hold a short-term Zacks Rank #4 (Sell). Among the other stocks in the same industry, Crane Co.
(CR - Analyst Report
), Macquarie Infrastructure Company LLC
(MIC - Snapshot Report
) and Tyco International Ltd.
(TYC - Analyst Report
) hold a Zacks Rank#2 (Buy) and are favorable options for investors.