Caesarstone Offers Solid Growth And A Premium Play On Housing

| About: Caesarstone Ltd. (CSTE)

With sales of new homes reaching their highest level since May 2008, investors can't be blamed for wanting a piece of the action. Over the last two years they have poured money into any investment they can find that has a remote link to the recovering housing market. Shares of Home Depot (NYSE:HD) are up 46% in one year and shares of Lowe's (NYSE:LOW) are up 62%. Homebuilder stocks are up even more since the Great Recession ended.

Shares of Caesarstone (NASDAQ:CSTE), a maker of high-end countertops, haven't exactly been overlooked. Shares are up 170% over the last year. However, investors might want to take a second look based on the company's outstanding growth prospects.

The Company

Caesarstone Sdot-Yam Ltd., as it is formally called, does one thing and does one thing extremely well. The company is a leading manufacturer of premium engineered quartz surfaces used in kitchens, bathrooms, and other parts of homes and some commercial buildings. Caesarstone is a pioneer in the engineered quartz industry, using a proprietary design and manufacturing process that includes combining crushed quartz, certain polymers, and pigments into an attractive smooth surface.

Caesarstone was founded in 1987 and is based in Israel. At this point, the company continues to manufacture all of its products in Israel. Caesarstone's premium surfaces are sold in 48 countries, including the United States. In its home country of Israel, Caesarstone owns a commanding 89% of the quartz countertop market. In Australia, the company's largest market by revenue, Caesarstone countertops enjoy 57% of the market and are almost a household name.

The Opportunity

While the company is wildly successful in the markets it has already penetrated, an enormous opportunity lies ahead in North America. Caesarstone went "all in" in the United States in 2011 when the housing market was making a turn. Caesarstone purchased U.S. Quartz, giving it a direct distribution model to help penetrate the market. Quartz surfaces only account for 6% of countertops sold in the United States. Caesarstone is already making huge strides in taking market share from dominate granite surfaces.

You won't find Caesarstone countertops in the large home centers like Lowe's and Home Depot. However, Caesarstone will be Ikea's exclusive non-laminate countertop provider under a new partnership. Caesarstone has already experienced turbocharged growth rates. In the extremely difficult period of 2007-12, revenue grew at a compound annual growth rate of 17.8%, according to the company's annual report. In order to support the company's fast growth and effectively penetrate North America, Caesarstone will open a new manufacturing facility in the United States. That project is slated to come online in late 2014. In addition the company added more capacity to one of its current manufacturing facilities in Israel this year.

Caesarstone sports a balance sheet as solid as its quartz countertops. The company has $73 million in cash and short-term investments and current assets of $184 million. The company has $40 million in total debt. It expects to fund expansion with proceeds of its 2012 IPO and through cash flow for the foreseeable future.

The Risk

The biggest risk to Caesarstone is a downturn in the U.S. housing recovery. Housing starts and existing purchases began to turn the corner in 2011 and 2012 and have since accelerated. Caesarstone depends on new home construction and home remodels to fuel sales of its countertops. A whiff of recession in this area will warrant a closer examination of the investment thesis. Continued sluggish housing starts and remodels in Australia could also be a drag on overall results.

Caesarstone's manufacturing is based in Israel. Turmoil in the Middle East could pose a significant risk to the company. Caesarstone also depends heavily on Turkey for some of its raw materials. While the company is trying to mitigate this risk by securing multiple sources of raw materials, this is a significant risk at the current time.

The Bottom Line

Caesarstone is in the early stages of what appears to be a tremendous growth opportunity for investors. The company is forecasting 2013 revenue of $330-$340 million. This represents growth of 11.5%-14.5% over last year's reported $296 million. Expanded distribution and sales in North America should fuel even higher growth rates for years to come.

With shares of Caesarstone only trading at 20 times forecast earnings, valuations don't seem very stretched. Despite a huge run-up in the stock price since its IPO, the runway for continued growth seems very long. Great financials and a tremendous growth opportunity make shares of Caesarstone as solid and shiny as their premium quartz surfaces.

Disclosure: I am long CSTE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Mr. Constantino is a proprietary investor and does not provide individual financial advice. The stocks mentioned in this article do not represent individual buy or sell recommendations and should not be viewed as such. Individual investors should consider speaking with a professional investment adviser before making any investment decisions.