Update: Caesarstone Q2 Earnings Rock-Solid Again - Guidance Increased

Aug. 8.14 | About: Caesarstone Ltd. (CSTE)

Summary

Revenue rose 30.4% Y/Y, driven again by accelerated 55% Y/Y U.S. sales expansion as the company continues to increase production capacity amid surging demand.

I am reiterating my long thesis and raising my target price to $70 from $58 after the strong sales and guidance increase. CSTE remains one of my strongest-conviction long-term recommendations.

The long thesis keeps working very well. The stock gained ~50% since November at its peak, and is still up ~28% after the dip which I recommended to buy.

Caesarstone, Ltd (NASDAQ:CSTE) reported better-than expected second quarter 2014 result (SEC filing, press release, earnings call). Revenues rose 30.4% Y/Y to $116.1M. The growth continued to be driven by spectacular U.S. sales growth rates, currently at a 55% annual rate, but Canada and Australia contributed as well. The Caesarstone brand continues to be a market leader, known for quality and innovative design and CSTE has been growing capacity to meet the strong demand. Gross margin excluding one-off items fell 4.2 percentage points Y/Y, primarily due to FOREX fluctuations, higher IKEA product mix which includes low-margin fabrication and installation revenue. Increased prices of raw materials had some minor effect, too. Operating margin improved by ~4 percentage points to 20.7% of revenues on higher production scale and increased revenues. Operating income was up 5.9% to $23.6M. Adjusted EBITDA rose by 23.3% Y/Y to $30.4M. Diluted net EPS was $0.51 versus $0.56 a year ago. Adjusted EPS was $0.58 versus $0.53a year ago.

The capacity expansion continues at Bar Lev facility. Richmond Hill, Georgia factory project is on schedule, with the first line expected to open in Q2 2015, followed by the second line two quarters later. After several delays, this is good news. CSTE even raised its investment in the new facility by 15% to meet strong demand faster. Based on strong Q2 results and improved production capacity, CSTE raised its full year 2014 guidance to revenue of $435 to $445 million (a ~7% increase). Adjusted EBITDA was also raised to $112M to $117M, up ~5%.

My original November 2013 long thesis, based predominantly on the continuations of the strong and accelerating U.S. market expansion worked very well, with the stock quickly gaining ~50% in a matter of months as the thesis proved to be correct. Later, it gave up some gains amid general small-cap weakness. However, the dip proved to be a great buying opportunity again, as I correctly called in my recent update of the long thesis in June. In terms of a disclosure, I am a happy owner of a quartz kitchen countertop. It was a great investment and I am almost sure it will outlive me due to its durability and the timeless, naturally-looking design. It is worth every cent I spent on it. Besides recommending a purchase of the CSTE stock, I actually strongly recommend that investors consider the quartz countertop for their next kitchen remodeling. The price is worth it.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.