Having a diverse set of businesses under one corporate roof has advantages and disadvantages, and for Raven Industries (NASDAQ:RAVN), the mix of business segments ranging from agricultural crop yield-enhancing tools to high-altitude balloons and military parachutes gives the company broad exposure to different sectors of the economy. Yet even though the company has prospered over the long run with this mix of businesses, Raven Industries has seen its stock drop precipitously in 2014. Coming into Thursday morning's fiscal third-quarter report, Raven shareholders wanted assurances that any weakness in revenue and earnings would be temporary. Despite results that were worse than investors had feared, Raven revealed a plan that it hopes will eventually restore the company to its former growth trajectory. Let's look at how Raven did this quarter and how it expects to get back on track.
A mixed bucket for Raven Industries
Looking broadly at Raven's results, the company's headline numbers were discouraging. Revenue fell by 13% in the quarter to $91.3 million, and net income plunged 45% to $6.78 million, resulting in diluted earnings per share of $0.18. Investors had already braced for substantial declines in both figures, but even with those pessimistic expectations, Raven fell short with its performance, missing EPS estimates by a nickel and doubling the expected drop in sales.
Looking more closely at Raven's three main business segments, the results were more mixed. The engineered films segment actually managed to grow revenue by 3%, and operating income for the division rose by 5%. As CEO Daniel Rykhus noted, "Sales of construction, industrial, and geomembrane films increased during the quarter," and efforts to cut costs and raise productivity also contributed to better results for the segment.
Moreover, even though the Aerostar business saw sales drop by more than 20%, segment operating income actually climbed 12%, making the largest upward contribution to overall operating income. Even as its contract-manufacturing sales start to slow down as anticipated, a greater emphasis on Raven's proprietary product lines has improved margins and helped the company make the most of the business it has been able to capture. Between the smart-sensing radar systems of its Vista Research unit and its lighter-than-air business, Raven sees Aerostar as a long-term growth opportunity.
Yet the worst news came from the applied technology segment, which focuses on the agricultural sector. Even though the long-term strength in agriculture in recent years has played a substantial role in Raven's stock performance, recent weakness in commodity prices has hurt the unit's results by stifling spending on capital equipment.
What's the plan at Raven Industries?
In response to its mixed results, Raven intends to make itself more balanced. Identifying the risk of being too concentrated in the highly cyclical agricultural sector, Raven intends to step back from its St. Louis-based contract manufacturing facility, as well as cutting its internal support for international sales teams and reducing marketing efforts. Moreover, by focusing its research and development spending on the areas with the highest potential for profit, Raven hopes to save $7 million in annual savings -- a substantial number on a revenue base of less than $400 million.
Conversely, Raven is looking to boost its presence in its other segments. For instance, the acquisition of Integra Plastics should help bolster Raven's presence in the film area. Integra specializes in high-quality plastic film and sheeting products, which complements Raven's existing business lines well. Rykhus believes that Raven can succeed in "measurably growing revenues from our situational awareness and lighter-than-air product lines, bringing high-value plastic film applications to each of our Engineered Films markets, and selectively pursue targeted Applied Technology opportunities" and thereby effectively rebalance its business focus to become more of a true conglomerate.
Raven is also aiming to reward shareholders. Back in August, the company kept its streak of annual dividend increases alive, boosting quarterly payouts by a penny per share to $0.13. Then earlier this month, Raven announced a new authorization to repurchase $40 million in stock, representing nearly 5% of its market capitalization and showing the company's continued confidence in its future.
Traders weren't pleased with the numbers from Raven Industries, bidding shares down 4% in the first half-hour of trading. Yet if Raven can execute on its turnaround plans, then the stock's declines this year could reverse themselves in due course and start reflecting the opportunities for success in each of Raven's main business areas.