Raven Industries (RAVN) Q2 Earnings Up Y/Y, Shares Soar

Shares of Raven Industries Inc. (NASDAQ:RAVN) surged around 11.6% to close at $24.00 yesterday, after it reported second-quarter fiscal 2017 (ended Jul 31, 2016) results. Earnings per share increased around 9% to 12 cents per share from 11 cents earned in the year-ago quarter. The bottom line improved as the repurchase actions taken over the past 12 months resulted in lower outstanding shares.

Operational Update

Sales increased around 0.8% year over year to $68 million in the quarter. Sales growth in the segments of Applied Technology and of Engineered Films, were offset by declining sales in the Aerostar segment.

Cost of sales decreased 0.5% to $49.4 million. Gross profit increased 4.3% to $18.6 million from $17.9 million in the year-ago quarter. Gross margin expanded 100 basis points (bps) year over year to 27.4%.

In the quarter, selling, general and administrative expenses went up 1.1% to $8.3 million from $8.2 million in the year-ago quarter. Operating income declined 0.5% to $6.4 million with operating margin contracting 10 bps to 9.4%.

Segment Performance

Applied Technology: Sales grew 13% year over year to $23 million. Sales to the aftermarket and OEM channels grew 13.5% and 12.9%, respectively, versus that in the prior year. Geographically, domestic sales were up 14% year-over-year, and international sales were up 11.1% year-over-year.

As against the prior year quarter, the operating income improved 27.8% to $5.2 million driven primarily by higher sales volume and lower manufacturing costs. Operating margin expanded 250 bps to 22.3% led by lower manufacturing expenses.

Engineered Films: The segment reported sales of $36.7 million, up 2.4% year over year. The increase in sales was driven mainly by higher sales into the Construction and the Industrial markets, partly offset by volume declines in the remaining markets.

Operating income rose 24% to $6.7 million due to higher sales volumes and lower operating expenses. Segment operating margin expanded 320 bps to 18.2% driven by raw material efficiencies and improved capacity utilization.

Aerostar: Sales in the segment were $8.4 million, reflecting a 25.7% decline from $11.3 million in the prior-year quarter, impacted by the timing of aerostat contracts with the U.S. government.

The segment reported an operating loss of $0.5 million, as against a profit of $1.3 million in the year-ago quarter. This decline in operating income was due to a significant reduction in aerostat sales year-over-year as well as the deferral of $1.4 million of pre-contract costs in the second quarter of last year that were related to certain international Vista Research pursuits.

Financial Update

Raven ended the quarter with cash and cash equivalents of $40 million, compared with $47.6 million at the end of the prior year quarter. The company generated cash flow from operations of $25.6 million for the six-month period ended Jul 31, 2016 compared with $23.7 million in the comparable year-ago period.

During the second quarter of fiscal 2017, Raven repurchased around 100,000 shares at an average price of $19.57 per share, worth $2 million. The remaining authorization at the end of the second quarter was $13 million.

Outlook

Raven expects to exceed prior year sales and adjusted operating income in fiscal year 2017. In applied technology, the company is increasing market share through technological advancements. Through sustained funding of key R&D projects over the last few years, it introduced two significant new products, Hawkeye nozzle control system and next-generation rate control system. These products are receiving very favorable customer feedback and generating strong demand. This is expected to continue in the second half of the year and into fiscal 2018.

In engineered films, Raven witnessed stabilization in the energy and geomembrane markets, albeit at a much lower level than the prior year. In the second half of the year, the company expects improvement in the overall sales performance for the division.

Raven is also focused on turning the Aerostar segment back to profitability. The company remains attached to its focus on building opportunities and converting these opportunities to backlog.

However, with U.S. corn prices persistently low and given the forecast for lower agricultural equipment sales volume through the rest of the year, the company believes the U.S. agricultural market will be a challenge.

South Dakota-based Raven is an industrial manufacturer offering a variety of products for agricultural, industrial, construction and aerospace markets. The company operates through three business segments – Engineered Films, Applied Technology and Aerostar.

Zacks Rank

Raven currently carries a Zacks Rank #3 (Hold).

Some better ranked stocks in the same sector are Barloworld Ltd. (OTC:BRRAY) , Crane Co. (NYSE:CR) and ACCO Brands Corp. (NYSE:ACCO) . All these stocks carry a Zacks Rank #2 (Buy).