We have maintained our Neutral recommendation on industrial products maker Raven Industries Inc. (RAVN). While the company is expected to return to the historic earnings growth levels in fiscal 2014 on the back of acquisitions and positive original equipment manufacturer (:OEM) demand, falling commodity prices and lower manufacturing efficiencies remain headwinds.
Why the Retention?
Raven’s earnings for second-quarter fiscal 2014 (ended July 31, 2013), reported on Aug 19,, missed the Zacks Consensus Estimate while sales came in line. Sales fell as declines across Applied Technology and Aerostar divisions more than offset a slight gain in Engineered Films.
Raven remains well positioned for long-term growth and profitability driven by benefits from investments made over the last few years, new product developments and expansion. The company stays optimistic on the OEM demand, which appears to have stabilized or is perhaps recovering.
Raven’s Engineered Films segment reported sales of $37.3 million in the second quarter, up 1% year over year. The segment will benefit from opportunities with agricultural barrier films and growing sales for new multi-layer geomembrane products.
In addition, with the global population expanding rapidly, Raven's Applied Technology Division has embarked on a mission to help farmers grow more food. Its continuing endeavor in precision agriculture and situational surveillance applications will support expansion as these markets have attractive fundamentals for growth.
Raven is also working to offset government uncertainty by expanding proprietary technology revenues including advanced radar systems, high-altitude research balloons and aerostats to international markets. It will be benefited from Project Loon, a new project for balloon-powered Internet access, in which Google Inc. (GOOG) will use Raven’s Aerostar-designed and developed high-tech balloons.
However, the Aerostar segment will continue to face government uncertainty and sluggish demand. The segment will also be affected by the planned transition from electronic manufacturing services to a more technology driven company, which does not fit the business model. This will bring some volatility in the results in the upcoming quarters.
For the third quarter of fiscal 2014, the company expects earnings to be affected by a challenging environment, falling commodity prices and lower manufacturing efficiencies due to line start-up costs. Moreover, increased investments in new initiatives, product development and the resultant increase in research and development and selling, general and administrative expenses will hurt margins.
Other Stocks to Consider
Among the other stocks in the same industry, Hutchison Whampoa Ltd (HUWHY) and Federal Signal Corp. (FSS) look favorably placed with a Zacks Rank #1 (Strong Buy) and a Zacks Rank #2 (Buy), respectively.