I recently added Raven Industries (RAVN) (41.29, $745mm market cap) to the Conservative Growth/Balanced Model Portfolio and then to a charitable foundation that I manage. Most likely, you aren't at all familiar with this South Dakota-based company. Neither was I until it came across a screen that I regularly run earlier this year, and then again several weeks ago. I have written about this screen before - it's my favorite: Undercovered small-caps with strong balance sheet, high return on capital, favorable earnings revisions and positive price momentum.
RAVN has three divisions and a subsidiary. The Flow Controls division has enjoyed spectacular growth, which isn't surprising given their focus on GPS-enabled technology for precision spraying that permits farmers to minimize the use of fertizlizer. Their focus is on the low-end compared to Trimble (TRMB). Engineered Films (how boring does that sound?) is a business with many applications, much of which can become commoditized. The company uses its technology to provide a differentiated product. An exciting application is in the Energy Industry (frac pits, reserve pits), but there are many others, including residential construction. Last quarter, the company spoke to the potential use in water conservation as well. Electronic Systems is a high-touch low volume outsourced manufacturer. This business has been hurt by the loss of a key customer, NovAtel, which was acquired late last year. Aerostar manufactures high-altitude balloons as well as parachutes for the military.
I like the management team here, which owns 12% of the company. They seem to be very straightforward and conservative. From what I understand, the company, which has been around since the '50s, had many divisions until this management team reduced the focus solely to areas where it could earn high margins. They target 15% return on invested capital and maintain a 12% sales and 15% EPS growth goal. I tend to believe them when they say that they are going to be back on track after a 2 year hiatus from achieving those goals. The balance sheet is very strong, with no debt and significant cash that keeps growing despite share repurchases and a 1.5% dividend. The board is contemplating a one-time special dividend.
This is my kind of company, excelling at what can be considered mundane. As you can see in the chart below, the rapid growth in the stock stalled a couple of years ago, but it has consolidated and is close to its all-time high. If the company were more widely followed (just two analysts, both regionals), perhaps investors would be aware that the company has continued to grow despite significant headwinds.
I mentioned the loss of NovAtel, which anniversary is later this year. The company is taking steps to right-size this business and boost margins. Additionally, high shipping costs could lead to some outsourced business coming back from off-shore. The Engineered Films division has seen some top-line challenges, but the rise in natural gas prices has been even more burdensome. Materials costs represent 67% of cost of these products. Meanwhile, the extraordinary growth in Flow Controls, which has been masked, should become more apparent.
I expect the stock to break to an all-time high soon and to reach 54 within a year. This level would represent 22X forward earnings, though my estimate is a bit above the street's. The company has beaten in the past 2 quarters and appears to have weathered the storm nicely. While two institutions own 27% of the stock, I don't believe that it is widely known otherwise. Hitting the 52-week high list could be a catalyst to improved awareness.
Disclosure: Long RAVN