CaesarStone (NASDAQ:CSTE) is coming off a really big beat, making it the sixth consecutive quarter that didn't have a negative earnings surprise. CSTE is the Bull of the Day as a Zacks Rank No. 1 (Strong Buy).
Six in a Row
CSTE has beaten or met the Zacks Consensus Estimate in each of the last six quarters. More to the point, the company has topped the number in five of the six quarters. That is the kind of earnings streak that long term investors love to see. An even bigger sign of strength is that over the last three quarters, the company was also able to post positive revenue surprises. Those top-line beats contributed to the outperformance on the bottom line.
CaesarStone engineers quartz surfaces under the CaesarStone brand primarily in Australia, the United States, Canada, and Israel. Its products consist of engineered quartz slabs, which are used as kitchen countertops in the renovation and remodeling end markets, as well as other applications including vanity tops, wall panels, back splashes, floor tiles, and other interior surfaces.
Most Recent Report
On Aug. 7, the company posted a big beat. In reporting $89 million in revenues, the company delivered a positive revenue surprise of $4 million, or 5.2%. The bottom line was even better. Earnings of $0.51 were $0.14 better than the Zacks Consensus Estimate of $0.37. This translates into a positive earnings surprise of 37.8%. Beats like that get your stock noticed. The market loved the quarter and sent the stock higher by 23% in the session following the report.
A Bigger Growth Rate
It's been said many times that the best way to find companies that will have growth in earnings is to look for those that are growing revenues. It's simple logic that the more revenue grows, the better chance a company will have to produce more earnings. That is just the case with CSTE.
Over the last four quarters, the year-over-year revenue growth rate has moved from 4.6% to 13.6%, 13.6% and 18%, respectively. That means there has been a big acceleration in revenue growth. Savvy investors know that can lead to earnings growth.
Earnings Estimates Launch Higher
Following the recent beat and earnings guidance, analysts have been busy moving their numbers higher. The Zacks Consensus Estimate for 2013 was $1.48 prior to the earnings report, but now stands at $1.65. That is a dramatic move higher. This increase in estimates is not limited to 2013. The Zacks Consensus Estimate for 2014 moved from $1.64 to $1.89, another big move up.
When looking at the valuation, I see a stock that is cheaply priced in terms of earnings, and priced at a mild premium based on other measures. The trailing P/E of 28x is significantly below the industry average of 43x, while the forward multiple of 25x is just below the 28x industry average. Price to book is a different story, with CSTE carrying a 5.5x multiple vs. the 2.8x industry average.
Price to sales of 4.5x looks rich compared to the 2x industry average. What stands out to me is that the expected revenue growth rate for CSTE is more than double the industry average, and CSTE carries a net margin of 17% vs. -2% for the industry average. To me, the earnings growth is shrinking the multiple, but it's only a matter of time before the stock price increase makes the multiple a good deal higher.
The price and consensus chart isn't that big for CSTE, but it tells the story that I just wrote in a glance -- and it's a short glance. The stock hasn't been around that long, so the analysts still need some time to figure out what is fully impacting earnings and the growth rates. Down the road, they will have a better connection to the sales channel for CSTE and will get a better grasp on what the sales estimates should be and where earning will be as well. For now, you can see the estimates move up dramatically, and when they do that you can bet the stock will follow.
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