Source: Raven Aerostar.
The stock market generally did pretty well in 2014, but not all companies were spared from losses. Conglomerate Raven Industries (RAVN) was among the stocks that suffered over the past year, as weakness in the agricultural market weighed on the company's ability to grow its precision farm control business. Coming into Wednesday morning's fiscal fourth-quarter report, Raven shareholders were looking for signs that the company's new plan to cut costs and rebalance its business exposure would bear fruit. So far, though, those efforts haven't panned out, and disappointing results will raise fresh questions about Raven's long-term strategy. Let's take a closer look at the latest from Raven.
A tough ag market shrivels up Raven's results
Raven's overall results continued their discouraging trend. Quarterly revenue dropped by 3% to $89.9 million, while net income fell by about a quarter to $6.2 million. Even those poor bottom-line results were bolstered by substantial one-time items; after adjusting for their nickel-per-share positive impact, adjusted earnings of $0.11 per share was down by more than half from the year-ago quarter's profit figure.
Again, though, Raven's three major segments showed a less clear picture of how well the company is performing. The engineered films segment, which makes products used for everything from industrial packaging to landfill covers, saw revenue soar by 15%; even excluding the impact of the acquisition of Integra Plastics, organic sales were higher than in the year-ago quarter. The Aerostar division, which makes radar systems, sensors, and high-altitude balloons, saw 3% higher revenue as well, with a big emphasis on building up its proprietary product lines showing some signs of success. Operating income figures for both segments were also strong, with engineered films rising 37% and Aerostar soaring 85% from year-ago levels.
Yet the real problem for Raven continues to be its applied technology division, where quarterly sales plunged by 27%. Customers simply aren't willing to spend as much on farm-related equipment in the current market environment, and that is weighing on Raven's ability to sustain segment revenue. Operating income shrunk by more than two-thirds, and that downward pressure has more than offset the positives from other business lines.
Source: Raven engineered films.
CEO Daniel Rykhus discussed the challenges Raven faces in agriculture. "The decline in end-market demand for Applied Technolgy has been more pronounced than previous expectations," Rykhus said, "and is worsening in the first quarter of fiscal 2016." He remained cautious about a quick recovery, saying "we do not expect a rebound in demand until late in the year at best."
Will Raven Industries start growing again?
Raven Industries is trying to remain optimistic, maintaining its long-term growth target of 10% to 12% operating income gain. In particular, the company is emphasizing the importance of taking advantage of the positive trends helping the company. "The underlying strength we have demonstrated in engineered films and Aerostar give us confidence in the future," Rykhus said, and Raven hopes the ag sector will eventually recover and return things to normal for the key segment.
Source: Raven Industries.
Yet Raven recognizes impatient investors want quicker action. The company said the $7 million in targeted cost savings announced last quarter didn't produce any immediate benefits due to offsetting severance payments and delays in implementation. But in response, Raven announced a new plan to cut another $13 million from its costs, with the applied technology segment taking the brunt of the restructuring impact. The company hopes, all told, to produce cost savings of $20 million this year and about $23 million on an annual basis thereafter.
Still, storm clouds could loom. The drop in oil prices will hurt demand for engineered films from the energy industry, even though some of Raven's production costs will fall as petroleum-product inputs becoming cheaper to obtain. Raven hopes the Integra acquisition will give it a better competitive stance in the industry and long-term growth despite the poor timing.
Despite fairly substantial shortfalls from what investors were expecting, Raven Industries shares didn't move much in pre-market trading, as the stock continues to hang just above the five-year low. For shareholders to regain confidence, Raven must execute on its strategic plans and see conditions improve in its core businesses. Until that happens, it could be hard for Raven to recover.
