Raven Industries Makes Investors Wait Longer for a Rebound

By Markets Fool.com


Source: Raven Industries.

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Companies often have trouble bouncing back from tough times, especially when bad conditions hit all of their lines of business at once. Conglomerate Raven Industries has had to deal with that phenomenon for a while now, as its stock has lost considerable ground even as it aims at trying to tap into some promising growth markets. Coming into Tuesday morning's fiscal first-quarter report, Raven shareholders had hoped that the company would show some signs of life, but its results instead contributed to a gloomy outlook that will continue to test the patience of long-term investors. Let's look more closely at Raven's results this quarter.

Raven sees revenue retreat
Raven's overall results showed just how much trouble the company has had in driving growth. Sales plunged 31% to $70.3 million, faring far worse even than the already considerable 18% drop that most investors had expected to see. Net income dropped by more than half to $4.86 million, working out to earnings of $0.13 per share, down from last year's $0.30-per-share showing. The only good news for Raven was that those following the stock had only expected earnings of a dime per share.

Even worse for Raven was the fact that its three major segments all fell in unison, breaking a pattern of mixed success from last year. The troubled Applied Technology division suffered a 30% drop in sales, sending operating income down by 45% from last year's figures. Yet what really surprised investors was a 26% drop in sales of Engineered Films, as profits from the segment also fell by nearly a quarter. The radar- and balloon-making Aerostar segment performed the worst, with a 63% plunge in sales leading to an operating loss for the division.

In Applied Technology, Raven blamed weak demand both from original-equipment manufacturers and from the aftermarket segment, as spending for farm equipment continues to be weak. What hit Engineered Films, though, was the decline in crude oil prices, which in turn held back production activity and therefore cut demand for Raven's products. Raven had expected some of Aerostar's difficulties because of planned reductions in contract-manufacturing sales, but even in the seasonal weak period of the year for the division, Aerostar posed a challenge for Raven overall.

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Source: Raven Industries.

CEO Daniel Rykhus still expressed optimism in Raven Industries' long-term future. "We are a financially strong company with a resilient organization," Rykhus said. "We have adjusted our cost structure for the current level of demand and we continue to look for opportunities to reduce expenses and further optimize our structure."

Can Raven Industries turn the corner?
Yet Raven Industries is still realistic about just how long it might take for things to turn around. Rykhus noted that corn prices have kept falling so far this year, with the crop now trading at eight-year lows. A lack of confidence among farmers has many putting off spending money even on investments that would improve productivity. At the same time, even with the recent bounce in the price of crude oil, levels of production activity, such as rig counts and oil-well completion rates, remain low, pointing to an extended period of weakness for Raven's Engineered Films division.

Raven has taken some aggressive action to try to shake things up internally. In the Applied Technology business, Raven recently put former CIO Brian Meyer in charge of the division, with Rykhus hoping that Meyer "will bring a fresh perspective and accelerate the execution of our strategy while at the same time preserving the investment and resources dedicated to innovation." Meanwhile, in Engineered Films, Raven has tried to balance the need to position itself for an eventual recovery in drilling activity against the desire to look toward other potential markets to absorb capacity and help the company manage its costs more efficiently.

Given how far Raven has fallen, it's likely that even modestly better earnings than expected could send the share price higher in the short term. Nevertheless, in order for Raven to improve in the long haul, it needs to shore up its three main segments and find new growth opportunities for each. Without the hope of greater activity in the future, Raven Industries could continue to slump throughout the rest of 2015.

The article Raven Industries Makes Investors Wait Longer for a Rebound originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Raven Industries. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.