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Raven Stays at Neutral

Zacks Equity Research

We reiterate our Neutral recommendation on Raven Industries Inc. (RAVN).  We expect the company’s revenues to benefit from the soaring demand for its geo membrane films.  But its margins would remain constrained due to increased capital spending and the prevailing drought conditions in the U.S.


Raven, in second-quarter fiscal 2013, reported earnings of 32 cents per share, missing the Zacks Consensus Estimate of 38 cents. Revenues improved 13% year over year to $101.7 million, marginally missing the Zacks Consensus Estimate of $102 million.


Sales and operating income in the Engineered Films segment were at record levels during the quarter, due to the soaring demand for the geo membrane films. The geo membrane films, meant for environmental protection, are experiencing higher demand as customers are keen on protecting water and other environmental resources for a sustainable future. Rising demand for the geo membrane films is expected to boost revenues further moving ahead.


Vista Research,  which Raven acquired in January 2012, has a high growth potential. Vista Research has recently signed a new $6 million contract with the U.S. government to support and further explore the applications of its radar technology. Moreover, the company is also focusing on increasing the customer base of Vista both in the domestic and international markets.


In addition, Raven aims at enhancing its product portfolio to increase its market share in the industry. The company introduced many new products in the applied technologies segment and has decided to further invest in product development in this segment in fiscal 2013 to meet the increasing demand of its customers.


However, increased capital spending will pressure margins moving forward. During the first half of fiscal 2013, capital spending increased $6 million. Capital spending is expected to increase to $35 million this year.  Moreover, R&D expenses in the Applied Technology and Aerostar division are also projected to increase.


Adding to the woe is the severe drought condition in the U.S which is expected to hinder Raven’s results, pressuring its revenues on the home front.


Our long-term recommendation is in line with the short-term Zacks #3 Rank (Hold).

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