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Raven Industries (RAVN) Down 10.2% Since Last Earnings Report: Can It Rebound?

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It has been about a month since the last earnings report for Raven Industries (RAVN - Free Report) . Shares have lost about 10.2% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Raven Industries due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Raven Q3 Earnings Up Y/Y on Higher Sales, Lower Taxes

Raven reported impressive results in the third quarter of fiscal 2019 (ended Oct 31, 2018).

The company's earnings per share in the reported quarter were 36 cents, reflecting year-over-year growth of 9.1%. The results include expenses of 2 cents per share related to the Project Atlas.

The bottom line benefited from sales growth and lower effective tax rate of 18.7% (down 14 percentage points from the year-ago level).

Applied Technology & Aerostar Drive Revenues

Net sales in the quarter increased 3.4% year over year to $104.8 million. Excluding $1.5 million sales from hurricane recovery films, the company's revenues in the quarter were $103.3 million, reflecting year-over-year growth of 11.2%.

The company reports net sales under three segments — Applied Technology, Engineered Films and Aerostar. The segmental information is briefly discussed below:

Revenues from the Applied Technology segment were $29.7 million, increasing 17.5% year over year. The results improved on the back of new products sales — primarily that of RS1 — and a rise in market shares.

On a geographical basis, the segment's sales grew 18.4% year over year domestically and expanded 14% internationally.

Revenues from the Engineered Filmssegment totaled $58.2 million, decreasing 10.6% from the year-ago level. Excluding $1.5-million sales from the hurricane recovery film, the segment's revenues in the quarter were $56.7 million.

The year-over-year decline was due to roughly 15% reduction in volumes on account of lower hurricane recovery film sales.

Revenues from the Aerostar segment grew 53.4% year over year to $17 million on the back of higher deliveries of aerostat contracts (including the U.S. Department of Defense contract that yielded sales of $2 million) and stratospheric balloon sales.

Margins Weak on Higher Costs & Expenses

In the reported quarter, Raven's cost of sales increased 6.1% year over year to $72.2 million. It represented 68.9% of sales compared with 67.1% in the year-ago quarter. Gross margin decreased 180 basis points (bps) year over year to 31.1%.

Research and development expenses in the quarter grew 58.7% year over year to $6.5 million. It represented 9% of the quarter’s net sales versus 4% in the year-ago quarter. Also, selling, general and administrative expenses increased 10% year over year to $12.6 million. As a percentage of sales, it represented 12% versus 11.3% in the year-ago quarter.

Earnings before interest, taxes, depreciation and amortization (EBITDA) were $18 million, down 16.7% year over year. EBITDA margin in the reported quarter was 17.2% versus 21.3% in the year-ago quarter.

Operating income in the quarter decreased 23.7% year over year to $13.6 million, primarily due to an 82.1% year-over-year fall in hurricane recovery film sales. Operating margin declined 460 bps to 13%.

Balance Sheet and Cash Flow

Exiting third-quarter fiscal 2018, Raven had cash and cash equivalents of $68.7 million, up 5% from $65.4 million at the end of the fiscal second quarter (ended Jul 31, 2018).

In the first nine months of fiscal 2018, the company generated net cash of $52.3 million from operating activities, increasing 69.6% year over year. Capital expenditure totaled $10.4 million, up 48.8% from the year-ago level. During the period, the company paid dividends totaling $14 million and refrained from repurchasing shares.

Outlook

Applied Technology is actively working to establish its strong foothold in the Latin American region by fiscal 2020 (ending January 2021). It also aims at providing superior customer service to both local players (especially original equipment manufacturers) and large enterprise firms.

Engineered Films anticipate gaining from growth investments (Project Atlas and geomembrane installation projectamong others) as well as healthy demand in the markets served (especially industrial) by them. However, sales of the hurricane recovery film are predicted to decline further (on a year-over-year basis) in the fourth quarter of fiscal 2018 (ending January 2019).

Aerostat's sales in the fourth quarter are predicted to be lower than each of the first three quarters of fiscal 2018. This is mainly dependent on the timing of contracts (mainly that of government's) and deliveries in the previous quarters. Continued sales growth is anticipated in the long term. Additionally, the company believes that revenues generated from the $36.2-million radar contract are likely to be recorded in the next five fiscal years.

How Have Estimates Been Moving Since Then?

Analysts were quiet during the last two month period as none of them issued any earnings estimate revisions.




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