CSTE - Caesarstone: Well-Positioned To Turn Around Under New CEO

2023-03-15 11:08:22 ET

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.

Introduction

Caesarstone ( 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.

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.

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.

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.

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