Caesarstone Ltd. (CSTE) has seen its stock price drop by about half over the past year, but we feel a major turnaround is in store. This corporation manufactures and markets engineered quartz and other countertop surfaces in numerous countries. You have likely eaten off one of their tabletops (as I do virtually every day), highlights Benj Gallander, president of Contra the Heard.
This enterprise is a global leader in its space and has been profitable every year since going public in 2012, except for the last two years. The corporation is conservatively operated and trades at less than half its book value. It pays dividends when annual earnings per share are greater than $0.10. Insiders are well aligned with investors as they own more than 40% of the company.
In the United States, the market share for quartz countertops jumped from 5% to 20% since 2010. In Canada, they possess 28% of the market, up from 9% since 2010.
There was a big revenue drop in the third quarter of 2023, to $142.4 million from $180.7 million in the prior year. The lower volumes were primarily impacted by global economic headwinds that resulted in diminished demand.
Gross margin in the third quarter of 2023 was 19.1% compared to 23% in the prior year. Adjusted gross margin in the third quarter was 19.8% compared to 23.1% in the prior year. The decrease in gross margin resulted from lower revenues and increased manufacturing unit costs due to lower fixed cost absorption mainly related to lower capacity utilization. This was partially offset by lower shipping costs and the benefits of an improved production footprint.
The operating loss in the quarter was $2 million compared to operating income of $3.2 million in the prior year. The decrease mainly reflects the reduced gross margin.
The corporate dividend policy is very distinct. Fifty percent of net income on a year-to-date basis will be paid, unless this is less than $0.10 a share, in which case nothing is given. That makes for a spotty payout and there will not be one from the most recent quarter. Yes, another reason to discourage potential investors and cause some people to sell.
Geopolitical risk is also an important factor with the firm. It is headquartered in Israel, where it has one of its three manufacturing facilities. Persistent tension and regular armed conflict in the region seem to have been going on forever and there does not seem to be an end in sight.
But this stock used to trade north of $71 seven years ago. Five years ago, it was almost $40. From this angle, it appears to have the ability to regain form with lots of upside. A stock price north of $30 seems eminently reasonable.
