Why Raven Industries Quickly Retreated From Last Week's Post-Earnings Pop

Raven Industries (RAVN) released better-than-expected fiscal third-quarter 2020 results early last week, initially sending shares of the industrial mini-conglomerate up more than 10% the following day as investors absorbed the news.

But Raven stock has all but given up its post-earnings pop in the days since, after cautious comments from management on current market conditions, and as broader stock market indexes have pulled back from their own record highs.

Now that the dust has settled, let's dig deeper to better understand what Raven Industries accomplished over the past few months, starting with its headline numbers.

Data source: Raven Industries. *For the quarter ended Oct. 31, 2019. 

A plastic liner, made by Raven's engineered films segment, on a golf course pond. Image source: Raven Industries.

Breaking it down

Raven Industries does not provide specific quarterly revenue or earnings guidance. But keeping in mind that per-share earnings were bolstered by stock repurchases over the past year (including 169,000 shares bought back for $5 million this quarter), most analysts were modeling slightly lower earnings of $0.27 per share on roughly the same revenue.

Broken down by segment, Raven's core engineered films revenue declined 3.1% year over year to $56.4 million, as growth from the agriculture, installation, and construction markets was more than offset by lower industrial and geomembrane market sales. As such, engineered films' operating income declined 8.3% to $8.5 million.

Applied technology segment sales declined 4.2% to $28.5 million, driven by difficult weather and poor yield conditions in North America. Applied technology operating income fell 9.1% to $700,000.

Finally, aerostar segment revenue fell 8% to $15.7 million, as higher radar platform sales were more than offset by a combination of lower aerostat sales and the timing of stratospheric balloon contracts. Coupled with higher research and development (R&D) expenses, segment operating income dropped 36% to $2.5 million. But the aerostar segment did win two new aerostat contracts totaling $10.4 million that should be delivered within the next year.

CEO Dan Rykhus said, "Despite the short-term challenges we are experiencing this fiscal year, the fundamentals within each of our divisions remain very strong, and we are well positioned to leverage our market leading technology to capitalize on business development opportunities." 

Raven's "next strategic pivot"

Near the end of the quarter, management also announced a new multiyear strategic growth plan made up of two primary growth platforms: Raven Autonomy and Raven Composites.

The former will revolve around leveraging Raven's applied technology segment to establish industry leadership in autonomous agricultural solutions. To that end, it also completed a pair of small acquisitions during the quarter, including autonomous farming solutions company Smart Ag and a controlling stake in autonomous agriculture platform specialist Dot Technology.

Raven Composites will focus on expanding the engineered films segment to build industry leadership in the reinforced composites market, namely via a combination of strategic acquisitions and R&D to promote product innovation.

"Raven's business model has remained consistent over time," Rykhus said. "However, we have made strategic pivots in the Company's history that have proven to be very beneficial. Raven Autonomy and Raven Composites are our next strategic pivot, and I can tell you that through my 29 years of experience with Raven, I've never seen an opportunity like this for Raven."

Moving forward

But that growth won't materialize in the near term. For now, the company says the applied technology segment is being held back by unfavorable weather, low commodity prices, and uncertainty surrounding U.S.-China trade relations. Meanwhile, demand for engineered films products is being constrained by weakness in the energy market, particularly given falling WTI oil prices and lower Permian Basin rig counts.

Of course, our market hates being told to hurry up and wait, so it's not terribly surprising to see the stock giving up its post-earnings gains in response. Until Raven can demonstrate more tangible proof that its new strategic plan can yield sustained, profitable growth, I suspect the stock will remain under pressure.