Raven Lags on Q4 Earnings, Shares Fall

Zacks Equity Research

Raven Industries Inc.’s (RAVN) shares fell 11% on reporting a 23% year-over-year decline in its fourth-quarter fiscal 2014 (ended Jan 31, 2014) earnings to 23 cents per share. The earnings fell short of the Zacks Consensus Estimate of 32 cents by a wide margin. Increased raw material costs in the Engineered Films segment, increased investments in research and development (R&D) for Aerostar and lower sales volume in Applied Technology led to the year-over-year decline.

Operational Update

Sales increased 3% year over year to $92.6 million, missing the Zacks Consensus Estimate of $97 million. The growth was driven by improved revenues in the Aerostar segment, partly offset by decreased revenues in the Applied Technology segment.

Cost of sales rose 7% year over year to $67 million. Gross profit declined 4% to $25.8 million from $26.9 million in the year-ago quarter. Gross margin contracted 200 basis points to 28% from the year-ago quarter.

Selling, general and administrative expenses increased 6% year over year to $9 million. Operating income plunged 20% year over year to $12.4 million with operating margin declining 400 basis points (bps) to 13%.

Segment Performance

South Dakota-based Raven is an industrial manufacturer offering a variety of products for agricultural, industrial, construction and aerospace markets. The company operates through three business segments, namely, Engineered Films, Electronic Systems, Applied Technology and Aerostar.

Applied Technology: Sales for the segment went down 5% year over year to $36.4 million. Operating income also dipped 23% to $10.8 million from $12.3 million in the prior-year quarter. Lower after-market demand in the United States and Canada offset higher demand from original equipment manufacturers (:OEM), improving performance in Brazil and robust contributions from new products.

Engineered Films: The segment reported sales of $35.6 million, improving 16% year over year. Barrier films for agriculture led the strong growth, specifically sales of fumigation and silage films. Sales of energy, construction and industrial films increased year over year. Operating income plunged 23% year over year to $3.4 million primarily due to higher resin costs.

Aerostar: Sales increased 3% year over year to $35.6 million. Segment operating income however fell 16% year over year to $2.3 million. Increased R&D investments to support Vista radar technology, as well as Project Loon with Google offset increased gross profits.

Fiscal 2014 Performance

Raven’s fiscal 2014 earnings per share dipped 19% year over year to $1.17, falling short of the Zacks Consensus Estimate of $1.26. Revenues dipped 3% to $395 million from $406 million in the prior fiscal, missing the Zacks Consensus Estimate of $399 million.

Financial Position

Raven Industries ended fiscal 2014 with cash and cash equivalents of $53.2 million compared with $49 million at the end of the prior fiscal. Cash flow from operating activities for the year was $53 million against $76 million in the prior year.

For first-quarter fiscal 2015, Raven expects solid growth in Engineered Films revenues from agriculture and higher OEM deliveries in Applied Technology. However, ongoing contract manufacturing declines and uncertain agricultural aftermarkets will be a deterring factor.

In the first quarter Raven expects profits to be flat to slightly down. Thereafter, the company is expected to deliver profit growth in the balance of the year. Overall in fiscal 2015, management anticipates higher profits compared with fiscal 2014 driven by growth in Applied Technology, realization of Aerostar's growth drivers and stronger operational performance in Engineered Films.

Raven currently carries a Zacks Rank #3 (Hold). However, some better-ranked diversified-operations stocks include Federal Signal Corp. (FSS), Noble Group Limited (NOBGY) and 3M Company (MMM). While Federal Signal and Noble Group sport a Zacks Rank #1 (Strong Buy), 3M Company holds a Zacks Rank #2 (Buy).

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