Constrained EPS with the high PE from several years of high growth will certainly keep the price of Raven stock down for the next quarter. Also Dan reduced expectations for the 4th quarter saying that while AT could surprise to the upside, both Aerostar and EF faced challenging conditions. Yet I suspect his reassurance that next year 10-15% growth would be attained after a mid single digit growth this year will keep the price from declining precipitously.
I do wish I'd had an order in for this morning's dive though.
I listened to the call. Amazing how many analysts and I strongly suspect individual investors with institutional titles have become interested in the stock. For example Alan Bronstein with AB analytical. But also Goldman Sachs had someone on the call today--and someone who did not display much knowledge of Raven I thought.
I liked Don Rankin's second question which elicited some color about OEM relationships. I had no idea there would be as many as 30 small manufacturers both domestic and international beyond the big 3 that Raven would have long term relationships with.
One question I have--what the heck is EMS. I heard it mentioned several times and thought I might figure it out when that question about intersegment sales elicited a response from Tom like that it was primarily composed of electronic sales from Aerostar to the AT division--so I guessed the E was for electronics but what the rest is I have no idea. But clearly Dan and Tom are using it casually like I should understand it.
Dan sounded competant and a bit more thoughtful than I've noticed in the past. He's now living a bit more dangerously having spent a bunch of money on infrastructure, acquisitions, and staff which has not yet shown results. So a commitment to achieve 10-15% growth next year means the company must perform. Or he will have to make excuses. As I look over my numbers it is clear that sales have remained fairly steady corporation wide but corporate overhead is now nearing $5mm a quarter after being around $2mm during all the previous CEO's years. That is 6 or 7 cents a share quarterly in additional costs which need to be covered by operating earnings. Probably a good investment, but not proven yet though Dan does keep saying the Vista is proving out well.
I was also struck by the fact that international sales were not broken out as they had been for several quarters and I'm so used to Raven's consistency that I had begun entering that figure in my spreadsheet, but when asked neither Tom nor Dan had really computed it or seemed to think it important enough to keep up. In fact Dan asked Tom if he'd computed it.
There is a lot more of interest here and I'm mildly disappointed though not terribly surprised. Someone asked Dan to tell what had surprised him this year and he listed lack of aerostat demand, (me too based on their expectations earlier), energy softening (I had expected some of that) and ag demand softening. Earlier he had suggested that parachutes might not continue to be as valuable a contract to Aerostar.
Did I tell you about my visit to a dairy farm which used silage bags. Their comment was that they worked well unless gophers or other creatures chewed through the bag and the contents began to spoil, and then that no one wanted the material after it was used and so it was just piling up around the farm. That suggests to me the value of the recycling effort and I suppose that is where some of the recycled material for vapor barrier film is coming from plus scrap in the factory. Clearly there is a lot of trimming necessary as the extruded balloon is trimmed and rolled into cylinders for shipment.
The call was pretty informative. Somehow I always have to go hunting for the income tax figure on my spreadsheet but I will find it. So that and no international figure for AT are my missing figures for now. Tom did a great job as usual and sounds in tune with Dan's strategy. I think he is just a good CFO who is proud of his responsible position without desiring to move to CEO. I'm glad we have him.
Thanks for the comments and the comments on the span board as well. I've been waiting for an entry point for Ravn and its possible i might get it as tax loss selling by individuals comes into play, especially after today's news, then add in the economy appearing to slow and the indecisiveness by our great politicians and just maybe I'll be back in
Hey Skip take a look at PLPC its pretty cheap based on a lot of metrics, but do your own DD and come to your own conclusion.
Thank you for sharing your thoughts and insights.
As for the analyst, it's interesting to hear that Raven is attracting some more attention. Perhaps in a decade or so they'll have more knowledge about Raven.
As for EMS? Perhaps the acronym is for electronics manufacturing services?
Raven's price is still nearly 20 times earnings and my holdings are down to about 8.25% of my total portfolio. I am about ready to buy another 5% of my RAVN holdings as a result, assuming I still regard the company as solidly as I have in the past.
One data point I recently noted was an article someplace listing the 15 or 20 lowest unemployment cities in the nation. All but two were centered around me in SE Montana. Well, probably a little further east including Sioux Falls and 3 in North Dakota. A lot of that is building and oil field work which are significant parts of the engineered films division customers. But oil drilling is slowing slightly now and, as I pointed out last week, I'm sure the competition will be moving into what has been easy pickings for EF division recently.
Second point is that overhead expenses have increased dramatically at Raven and will not be going down. On top of that, there are several new managers whose capabilities and characters are being developed and learned right now. Bound to be some clinkers in there and how effectively and quickly those personnel problems are minimized will make a huge difference to the results Raven shows.
Q3 has typically been the second strongest quarter of the year for Raven. Q1 is the biggest due to that being Applied Technologies best agricultural quarter, but Q3 is strong because EF typically enjoys high sales and manufacturing efficiencies during that quarter. And there is more capacity available this year, so I expect another pretty strong quarter from EF.
Foreign sales seem encouraging in AT and I see little reason for concern there except for the drought conditions around so much of the US. Still, better efficiency as offered by Raven equipment may be the answer for many farmers. So I think results from that division will be OK though not blowout due to increased overhead.
Aerostar is not likely to do very well. I'm rather dubious about how successful they will be running the electronic systems division. Furthermore, with labor conditions so difficult around the rest of the nation, winning new government contracts is apt to be impossible. Competitors with even larger overhead problems than Raven will be grabbing for even unprofitable business just to cover fixed costs. I suspect the division may manage to show breakeven levels on a operating earnings basis, but don't expect much more than that.
Overall, I think Raven is still in a basing mode as it rearranges it's assets and invests more money in places, people, technological acquisitions. Thus for the next few years I don't expect a lot of price increase for the stock. However, I think this quarter's results will reassure the market a bit that Q2's year over year decrease in EPS was an anomaly and at least some growth can be counted upon. Raven is still a solid company in good businesses with good management. But it's in transition and I might be foolish to buy more stock now. Best, L.
EF lost more sales than I expected. And my suggestion that Aerostar would likely do little better than breakeven was a misstatement on my part. I figured they'd make about what they did in operating earnings ($3.8mm) or a million or so less. But that is still a weak result relative to the combination of op income we have seen between the defunct ES division and Aerostar. So, lower sales and op income at Engineered Films accounts for most of the difference from my expected result of about $.32 per share ($.30). And the decline from Q3 EPS for the past two years of $.315.
To reiterate, $4.6mm (doubling) of corporate expense was expected but a decrease in 3rd qtr sales/income at EF is why results were less than I expected. Decreased op income at Aerostar-ES were as expected but weak.