Caesarstone Sdot-Yam Ltd. Finds Faster Growth in the U.S. Market

By Markets Fool.com

Image source: Caesarstone.

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Quartz surface manufacturer Caesarstone(NASDAQ: CSTE) on Wednesday posted an acceleration in sales growth on strength from all of its key markets. Profits also improved as the company worked out inefficiencies from its new manufacturing plant.

Here's a look at how the headline results stacked up against the prior-year period:

Metric

Q2 2016 Actuals

Q2 2015 Actuals

Growth (YOY)

Revenue

$142 million

$128 million

12%

Net income

$25 million

$23 million

11%

Earnings per share

$0.73

$0.65

12%

Data source: Caesarstone's financial filings.

What happened this quarter?

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Sales rose by 12% and marked a solid boost from the prior quarter's 8% expansion rate. Key to that increase was a slight uptick in the critical U.S. market, but strong demand in Australia and Canada also contributed to the strong numbers.

Highlights of the fourth quarter include:

  • The U.S. business improved at a 5% pace, compared to 3% last quarter. While that's far from the double-digit growth rate Caesarstone enjoyed last year, it was the company's first sequential uptick since mid-2015.
  • Canada and Australia made bigger contributions to growth, with 27% and 24% gains, respectively.
  • Gross margin ticked up to 42% of sales from 41%, reversing the declines that investors have seen over the last few quarters. Executives credited higher-margin product sales and economies of scale for the boost.
  • Operating expenses rose as a percentage of sales due to increased marketing and advertisement costs, particularly in the U.S. geography.
  • Bottom-line profitability held steady, with net margin clocking in at 18% of sales.

What management had to say

"We are pleased to have delivered a strong quarter," CEO Yosef Shiran said in a press release. "Our good performance in major markets around the world reflects both the strength of our brand and our consistent execution." Regarding the minor rebound in the U.S. market, Shiran said, "we have worked hard and implemented various changes to deepen our capabilities and to support the execution of our go to market strategy." Yet the company is targeting more progress ahead.

"We expect to leverage our global strength to achieve our full-year plan while we successfully position our U.S. business for accelerated growth in 2017 and beyond."

Looking forward

Shiran and his team reiterated their full-year forecast of sales as high as $565 million, for 12% growth over 2015. Adjusted profit margin are expected to weigh in at 25%, which is also comparable to last year's result.

It's encouraging that the company can keep its growth pace up without needing major contributions from its biggest market. The U.S. business is up less than 4% through the first six months of the year, compared to 18% for Australia and 27% for Canada.

However, as they demonstrated with their recent capital investment in opening a new domestic plant last year, executives see the U.S. as critical to their long-term growth plan. That's why it is good news that the marketing, advertising, and sales adjustments that Caesarstone made appear to be working. It also helps explain why investors, by 11:30 a.m. Wednesday, had sent Caesarstone's shares up by 15% from the previous close even though the company's short-term sales and profit forecast remained unchanged.

The company named an interim replacement to Shiran, who announced in May that he is stepping down from the CEO position. His successor will be named by September, Caesarstone said. In the meantime, it will be led by the board's president, Yonathan Melamed.

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Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Caesarstone. 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.