Caesarstone Ltd Notches Faster Growth, but Decreased Profitability

By Demitrios Kalogeropoulos Markets Fool.com

Quartz-surface manufacturer Caesarstone(NASDAQ: CSTE)announced fourth-quarter earnings results on Wednesday that included an encouraging step back toward growth in its biggest market. A surprisingly small decline there allowed the company to outperform management's revenue expectations for the quarter and the full fiscal year.

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

Metric

Q4 2016 Actuals

Q4 2015 Actuals

Year-Over-Year Growth

Revenue

$135 million

$127 million

6%

Net income

$15.3 million

$19.4 million

(21%)

EPS

$0.44

$0.53

(17%)

Data source: Caesarstone's financial filings.

What happened this quarter?

Sales growth improved to a 6% pace from 4% last quarter, thanks mainly to strong gains in the Australian and Canadian markets that were only offset by a slight decline in the United States.

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Image source: Caesarstone.

Here are the main highlights of the fourth quarter:

  • Sales fell by 3% in the U.S. to mark an improvement over the prior quarter's 5% drop.
  • Australia and Canada continued posting sharp demand growth, and the Europe market fell slightly.
  • Gross margin was flat, at 38% of sales, as increased production expenses offset a drop in raw materials costs.
  • Operating expenses jumped by nearly 2 full percentage points, to 22% of sales. The company ramped up spending on marketing and on strengthening its selling infrastructure with the aim of getting back to sales growth in the U.S.
  • Caesarstone took a $3 million legal charge that reduced reported profits.
  • Bottom-line profitability fell to 22% of sales from 24%.

What management had to say

Executives said they were encouraged to see evidence that their increased focus on marketing support was paying off. "We are pleased to have momentum in our U.S. business, which has begun to benefit from investment in our sales and marketing capabilities," interim CEO Yonathan Melamed said in a press release. The U.S market was flat for the full year compared to a 20% spike in 2015.

Yet management had forecast an even weaker result, so Caesarstone's 2016 sales of $538 million beat the $529 million it predicted three months ago. "Our brand continues to demonstrate global strength and we continue to innovate new products that position us as a clear market leader and establish further growth opportunities for the company," Melamed continued.

Looking forward

Melamed and his executive team issued their first guidance for 2017, and it calls for revenue to rise by between 8% and 11%, implying a slight acceleration in growth. A new quartz-overlay service that will be marketed through a partnership with home-improvement retailer Lowe'scould help push results higher in the U.S. market. Global results, meanwhile, should get an extra lift from the company's entry into the U.K. The key number for investors to watch going forward will be U.S. growth, since that country accounts for nearly half of sales.

Caesarstone's earnings forecast reflects management's expectation for rising spending aimed at producing better results in that critical market. Adjusted profits should decline to $123 million, which would push profitability down to 21% of sales from 24% last year and 25% in 2015.

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