Caesarstone: Well-Positioned To Turn Around Under New CEO

Summary

• Caesarstone is a global leader in the quartz and porcelain countertop markets.
• It had a rough 2022 and the outlook for 2023 is mixed.
• The company is attempting to rein in costs and has announced layoffs.
• The former CEO from 2009 to 2016 recently retook the helm.
• Despite the turbulence, CSTE is a good business with high insider support, strong financials, and low valuations.

Michael Reeve/iStock via Getty Images

Introduction

Caesarstone (NASDAQ:CSTE) is headquartered in Israel, is an international leader in the quartz countertops market, and, through its Lioli brand, is a key player in the porcelain countertop business. If you have recently bought or renovated a home, you may well have used their products. In the prior year, about half of revenues were generated in the United States, with Australia and Canada accounting for 16.8% and 13.5% of sales respectively. The organization also does business in Latin America, Asia, Europe, and Israel.

For full disclosure, we bought a position in Caesarstone at $10.61 in December 2020 here at Contra the Heard Investment Newsletter and it has been one of our worst performing positions. We continue to hold and have not sold any shares since it was first purchased.

2022 Performance And Results

Caesarstone’s 2022 revenue climbed to $690.8 million from $643.9 million in 2021. Though this represents solid growth, it is also where the good news ends. Management’s original 2022 revenue guidance called for sales between $710 million and $725 million. During the third quarter conference call, the c-suite had to cut this outlook to a range between $690 million and $700 million, citing the impacts of unfavorable foreign exchange rates and a reduction in home construction and renovation activity brought about by higher interest rates.

Margins were also impacted in 2022, with adjusted EBITDA coming in at 7.5%. The top brass originally anticipated generating adjusted EBITDA margins of 10.0% to 11.0%, but again this projection was cut in the third quarter to a range between 8.0% and 8.5%. This inability to hit even the reduced margin targets can be attributed to inflation, which manifested in higher transportation costs and raw material prices.

macrotrends - CSTE net income table

2022 was the first year CSTE did not make money on an annual basis since its IPO in 2012, as the table from macrotrends above illustrates. In turn, the net loss impacted the corporation’s dividend payments. The enterprise lost $57.1 million due to goodwill and long-lived asset impairments of $71.3 million. This red bottom line compared to a gain of $19.0 million in 2021. The company’s dividend policy is to pay out 50.0% of reported net income on a quarterly basis so long as it translates into a payment of greater than $0.10 per share. Given the red ink, no distribution was issued in the fourth quarter.

In addition to losing money and cutting the payout, the shares fell 49.7% during 2022, and in December, the corporation announced it was cutting a tenth of its global workforce, or over 200 people. 2022 was a bad year for Caesarstone, its employees, and its owners.

2023 Outlook And Strategy

The 2023 forecast is mixed. The top line is projected to be flat, and adjusted EBITDA is expected to see “moderate and gradual” improvement on price increases in their main markets. The company will continue cost optimization efforts, which management assumes will offset higher raw material and shipping costs. Though the CFO noted the outlook is achievable and appropriate, it is important to remember the c-suite had to reduce its 2022 estimate as the year progressed, and it may have to do the same for 2023, especially given the state of housing.

In response to the current challenges, the corporation has increased production coming from third parties in lower-cost countries and implemented a variety of other cost control measures, including the headcount reductions. In addition to cutting expenses, it will expand its US footprint, invest in new territories (such as Sweden), and launch new porcelain products within North American in late 2023.

Seeking Alpha - CSTE net margin table

The role of Chief Executive Officer has also changed. Former CEO Yosef Shiran, who previously ran the outfit between 2009 and 2016, has taken over the reins again. When Yosef was last in charge, he took the company public, roughly doubled sales, and maintained net margins in the mid-teens – as highlighted in the Seeking Alpha table above. These actions drove the ticker to an all-time high of over $70.00 in 2015. Since his departure, the stock has declined to where it sits today at approximately $4.75, and net margins have never notched higher than 4.5% on an annual basis. From a shareholder’s point of view, the hope is that he can turn the ship around and replicate some of the organization’s past success.

Underlying Fundamentals

In addition to Yosef Shiran’s return as CEO, the company has a strong foundation upon which to build. Its balance sheet is clean, it is an industry leader, and insiders own 40.7% of the stock.

Since the enterprise went public, it has maintained a flat share count, a current ratio consistently above two, and carried minimal debt. These financials mean the organization should be able to weather industry downturns and take advantage of slowdowns. In the past, it has grown its market share through organic expansion as well as through bolt-on M&A, including the acquisition of Lioli Ceramics in 2020.

Finally, Caesarstone’s valuations are low versus the index and where it has traded in the past. This valuation table by Morningstar highlights how cheap the name is versus the market and the stock’s five-year average.

Morningstar - CSTE valuation table

Valuations are not the be-all and end-all, but low valuations are a good sign and are preferable to high valuations. If the management team can turn the business around, the investor community may bolster both the valuations and the stock price.

Conclusion

Caesarstone is a global leader in the quartz and porcelain countertop markets. The organization had a tough 2022 and recorded its first annual net loss since it went public over a decade ago. The guidance for 2023 is mixed due to inflationary pressures and shifts in demand caused by higher interest rates. The company is attempting to rein in costs, has announced layoffs, and has rehired its former CEO, who was in charge from 2009 to 2016. Caesarstone excelled under his leadership, and the hope is that he can boost the corporation and share price performance again. CSTE is a good business with high insider support, strong financials, and low valuations. These attributes should serve owners well as management looks to turn the enterprise around.

Disclaimer

The opinions expressed – imperfect and often subject to change – are not intended nor should be taken as advice or guidance. The information enclosed in this article is deemed to be accurate and reliable, but is not guaranteed by the author.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CSTE either through stock ownership, options, or other derivatives. 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.

Comments

[investinrest]

Hi Phillip, sorry to blow your horn, but this company is in a death spiral for the last 7-8 years, and no light at the end of the tunnel.

Just look how sloppy they are, CEO was replaced over a month ago, but they don’t think it’s important enough to replace the former CEO on their website (look under investor/governance/executive management

Also, when was the last time you looked at Omicron’s website? That’s the company that makes them over $100mm in annual sales. The website is completely broken and was probably built in the early 2000.

To top it off, the use third party IR. To me this is an insult to shareholders. You want to tell me this small cap is not capable to have one of the executives to communicate with shareholders? Try to get a response from the 3rd party outsourced IR service. Good luck with that.

Key will be to see what the new/old CEO comes up with.

Not sure what’s his motivation to take the reins, most probably ego IMHO, because money he has enough, and headaches you can get in many other setups nowadays.

[Theangryswede]

There’s considerable liability associated with silicosis, especially related to downstream companies fabricating slabs. Caesarstone is specifically called out for ignoring the risk (and not communicating the risks to fabricators) in a 60 Minutes Australia piece. As a result, Australia is considering banning engineered stone outright.

[MRTAY]

They are a dumpster fire. Every competitor in the game is better than them currently they are extremely behind in industry standard sizing. 3x the cost. It took me over 6 months to get ahold of their AR to pay a bill. No answer no return calls. My rep couldn't even get them to pay. Their new show room hasn't opened in 2 years in an industry customers need to go to the show room to see the product. They are specked heavily in projects, but every job I have done with them they have been value engineered out of the project. I am on their absolute best discount key and they are so poorly run and have such bad pricing the stuff barely moves.

These are all things that you won't find on a statement. I watched as their US factory couldn't get online for 3+ years and they would ship out slabs to their distribution points and have them break them and throw them in the dumpster so they could fudge their deliveries and AR.

All their competitors are private owned. ASG and architectural surfaces are a major competitor. Daltile owned by mohawk. Siltstone and Cambria price themselves out of the larger market. MSI crushes them both but Silestone or more accurately Consentinos does ok in commercial. Arizona tile is another good brand.

My company can usually do your entire project for a 3rd of what it costs you to do it in caeserstone with a product that looks better. I have had more claims on caeserstone than any other product. Until Caeserstone drastically reduces the cost of their product, makes the standard size at least 63 x 126 (standard 36" island + 26" back run massively increases utilization), and increases the efficency of their operations; they are headed to bankruptcy. I have told their regionals, their vp's, and most their higher ups this for 6 years. They have the worst service even B2B. A negative earnings per employ. They actually have great guys and girls working for them. They just tie their hands and say we are going to do it our way, and their way is to know nothing about the actual industry they serve and how it works.

[Philip MacKellar]

@MRTAY Thank you for commenting, this is great colour.

[PriceMatters1949]

@MRTAY Thanks for sharing. Some of your comments fill in the blanks for their continued profitability slide. However, your sharing a positive outlook. They have been profitable the entire time that you are suggesting they have been incompetent. They have a new (previous) CEO. If he cleans up some of the issues you suggest, the company could do ok when the remodel/building market returns. They have a strong balance sheet to wait it out. I’m not suggesting it’s a great business - but at this price it is probably a decent cigar butt if you like those types.

[Pralay]

Thanks for the article and nice uodate. Who are their main competitors? How are they doing?

[PriceMatters1949]

@Pralay From what I can gather they directly compete with Consetino/Silestone (Spain) and Cambria (MInnesota) brands. Both companies private, not sure how they are doing. Great question though!

[Philip MacKellar]

@Pralay Hi there, thanks for reading. It is hard to know how their peers are doing b/c they are private - as PriceMatters1949 has mentioned too. I think this is a bit of a risk here b/c sometimes publicly traded peers can give you a more holistic overview of how the industry is doing. Imagine how much more in the dark, for example, investors would be today if only a handful of publicly traded regional banks existed.

Nevertheless, to answer your question, Silestone is the major one I keep hearing about within the North American market. Marble and Cambria are two others that come to mind. I did some digging for you and found these articles:

www.toulmincabinetry.com/...

marble.com/...

These confirm what I thought though there are names in there I did not know. Another aspect of competition you may be interested in is between different types of counter tops. This article could be useful for you in that regard. The author appears to update the costs regularly enough – I check it every quarter or two:

www.remodelingcosts.org/...

Thanks again for reading. I hope that has helped.

[Socratic Investor]

Hard to buy at this time with interest rates up, housing starts declining and everyone expecting a recession to come in the next year, but thanks for the article and I'll keep an eye on the company.

[Philip MacKellar]

@Socratic Investor you're welcome, taking contrary positions is not always easy.

[PriceMatters1949]

Thanks for the article. I had been watching CSTE for months and started buying when it went under $5. They have a very strong balance sheet ($230M) more then mkt cap. After taking care of liabilities most of this is PPE and inventory. But that is still a lot they can lean into while getting their costs in order.
I would like to understand why profitability has been dropping since 2016, maybe they reduced prices to grow revs? Or could they have been first out with quartz and their competitors caught up during that time? What are your thoughts on the gross margin slide from 2016 to now?
This upside on it is significant, if they return to previous margins they could be earning $75M plus. The downside should be limited with their ability to lean on balanave sheet - they could probably liquidate and break even at current mkt cap (obviously they wouldn’t do that, but it is one angle to look at it).
Cheers and best of luck

[Philip MacKellar]

@PriceMatters1949 Hi there, thank you for reading. The strategy changed in 2016 when the now rehired CEO left. Revenues were prioritized over margins, as was market share of quartz countertop products vs. competitor products. The quartz segment competition - as far as I can tell - has increased too. I'd be surprised if the rehired CEO could achieve all of the success CSTE had in the past but I'd be even more surprised if he continued the status quo. I hope that helps, cheers and good luck to you too.