Get 32% Upside With This Unique Construction Stock

StreetAuthority Network

I've been in this racket for nearly two decades. And I have to say, I've heard lots of creative excuses from companies for missing earnings estimates, all of which seem to be about as effective as "the dog ate my homework."

The weather has always been my favorite excuse especially with retail and homebuilding and related supply stocks. "It was too hot, so people didn't buy." Or "It was too cold, so people didn't come out."

Granted, here in the U.S., we did have an extremely cold and extended winter. So, when first-quarter earnings rolled out this year, the weather was blamed by more businesses than usual. But one building products company caught my attention by delivering stellar earnings without a mention of the snow or ice -- and its back story is even more intriguing than its growth rate.

Based in Israel, Caesarstone Sdot-Yam (Nasdaq: CSTE) is a leading manufacturer of engineered quartz surfaces used mainly in countertops for the residential and commercial markets. The company sells in 42 countries through both direct and independent distribution.

Since its 2012 IPO, the stock has been on a tear.

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But as interesting as CSTE's merits might be, the story of where the company came from is as interesting: Caserstone has evolved from a small, ailing flooring tile manufacturing business owned by an Israeli kibbutz to a publicly traded entity with a market cap of over $1 billion.

Originally (and I'm talking 1948 originally), a kibbutz was a collective community, usually agriculturally oriented, designed to help residents and settlers of the new state of Israel. They were rooted in socialism, but as the nation developed rapidly, many of the kibbutzim -- especially those centered on some type of manufacturing -- privatized. Sdot-Yam is the name of the kibbutz where Caesarstone was formed.

The company developed a quartz-based surfacing material. Quartz is one of the hardest minerals known, and Caesarstone's product is impermeable and stainproof. Last year, Caesarstone had $356 million in sales, and the growth continues.

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Revenue is on track to grow at an average annual clip of 15% over the next three years, to $516 million by 2015. The earnings outlook is even stronger, with a three-year forecast of 26% growth per year. Caesarstone booked $1.80 in earnings per share last year; consensus estimates are for EPS of $2.15 this year and $2.73 by 2015.

Recently, Caesarstone inked a distribution deal with furniture giant Ikea. Management has not shared definitive numbers on the revenue impact of the partnership, but the company is working on increasing its volume to meet the demand from Ikea stores.

Quartz surfacing for residential use is a relatively new product. Market penetration is at about 6% in the United States and only 8% worldwide, so there's plenty of market share to gain. Combine that with double-digit organic EPS growth and revenue increases, and the stock has all the makings of a classic growth story.

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Risks to Consider: The biggest risks to Caesarstone include a slowing economy as well as the risk of geopolitical tension in the region where most of the company's production is based. One of the better defenses the company has is a long-term debt-to-capitalization ratio of just 4%. The company is generating enough cash for its needs, but Caesarstone is seeking to bolster its cash position with a secondary offering of 5.5 million shares -- which has the potential to be dilutive.

Action to Take --> Shares of CSTE currently trade around $45 with a forward price-to-earnings (P/E) ratio of just 20.7, which I consider cheap for a high-growth stock. Being lumped into the momentum stock group, it looks like a bargain at a 26% discount to its 52-week high. Based on the stellar growth, penetration potential of the product and the attractive entry point, I'm setting a 12- to 18-month price target of $60, representing 32% upside.

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