Quartz-surface manufacturer Caesarstone (CSTE 9.00%) announced third-quarter earnings results on Nov. 4 that showed signs of a growth pickup in its biggest -- and most profitable -- market. And that good news outweighed the company's weaker profitability in investors' eyes. The stock jumped higher by 11% immediately following the third-quarter announcement, though shares are still down significantly from their August high.
Here's how Caesarstone's headline results stacked up against the prior-year period:
Caesarstone's results: The raw numbers
|
Q3 2015 Actuals |
Q3 2014 Actuals |
Growth (YOY) | |
|---|---|---|---|
|
Revenue |
$137 million |
$123 million |
11% |
|
Net Income |
$27 million |
$20 million |
(25%) |
|
EPS |
$0.76 |
$0.56 |
(36%) |
Source: Caesarstone's financial filings.
What happened with Caesarstone this quarter?
The third quarter was characterized by strong sales growth (after adjusting for currency swings) along with declining profits. Here are the highlights from the period:
- Global revenue rose 11%, or 24% on a currency-neutral basis.
- Sales in the United States, a critical market, improved by 22%, an acceleration from last quarter's 19% gain.
- Gross margin sank to 40% of sales from last year's 44%. Management blamed the early production ramp up in its new U.S. manufacturing facility for raising costs.
- Operating margin fell to 22% of sales from 25%, also due to the bounce in manufacturing costs.
- Outlook for 2015 was affirmed at $500 million of sales at the midpoint of guidance, but expected growth in the U.S. was lowered slightly.
What management had to say
"We are pleased with our results in the third quarter, which demonstrate the continuing strength of our brand and business around the world," CEO Yosef Shiran said in a press release. The U.S. market led the way for the operations, and management sees that continuing through the end of 2015. "Our core business growth in the U.S. remains solid and we expected to show healthy growth next quarter," Shiran told investors in a conference call.
Image source: Caesarstone.
As for the spike in production costs, executives explained that it is just a matter of getting Caesarstone's two new U.S.-based manufacturing facilities up to speed. "We are endeavoring to allocate production efficiently across our global manufacturing footprints, while balancing cost and time to market considerations," Shiran said.
Looking forward
Caesarstone reiterated its $500 million sales outlook for the year but lowered its expectations for growth in the U.S. market. Yet that downgrade is just the result of a timing event that's related to sales to furniture giant IKEA, one of its biggest customers. Management said the shift will remove roughly $5 million from revenue growth in the U.S. this quarter.
Over the longer term, the company is encouraged by improving production efficiencies at its new plant in Richmond Hill, Ga. The first manufacturing line at the plant is running at nearly full speed while the second line is just about to start up. Once that facility gets to full operating capacity, investors should expect profitability to start climbing again. At the same time, management is working to "continue to position Caesarstone as an industry leader to support our long-term growth and profitability," according to Shiran.
