Why I Bought Shares in Caesarstone

My romantic, love story with Caesarstone

Published on:
December 29, 2017
Written on:

About The Author

Noam Ganel, CFA is the founder of Pen&Paper, a value-oriented, contrary-minded journal of the financial markets. Noam worked as a Vice President in Capital Markets at Silvergate (publicly traded on NYSE under SI since Nov-2019.) At SI, which he joined in 2010, Noam was responsible for advisory services to family offices,  private companies, and financial advisors.

Every week, I glance at the financials of 15 to 20 companies that are trading at a 52-week low. Many of the stocks I purchase appeared first in that list. Famous Dave is an example that comes to mind. Regal Entertainment is another.

By focusing explicitly on the list, I do two implicit things. (1) Stocks in the list are usually unpopular and I get to learn about new businesses (Amazon was never on the list), and (2) the list forces me to think and understand why the stock is on the list in the first place. 

And there is always a reason. 

It is my job – or some would argue, hobby - to find out why; to reflect whether I agree or not with the market determination, and whether to do something about it or not.

Compare that to the typical manner in which some investors purchase stocks. Often, it is because they realize their least favorite brother-in-law made a killing on Bitcoin. Or they read in Barron’s that company ABC has tremendous growth potential. Or, if they have a brokerage account, they read a sell-side equity report about company’s XYZ market share potential and how capital markets have yet to comprehend that.

The careful reader will observe that the latter process is passive compared to the former. Looking at stocks using the 52-week low list forces you to look for answers.

So that’s how I found Caesarstone this week. Caesarstone (CSTE) profited an average of $1.90 over the past five years. During that time, its stock traded at an earnings multiple between 20 to 43 times the earnings with an average earnings multiple of 22 times. With Caesarstone at a price of about $22 it is trading at 12 times the earnings multiple. So I became interested in knowing more about the company.

My first two questions were: how much leverage does the company have and why is the company trading at a 52-week low?

I learned that the company hardly uses debt. As of the third quarter of 2017, the company could pay all its debt obligations with its cash in the bank. Its operating earnings represented over 10 times the interest expense. As a comparison, our average household income to debt in the U.S. is less than 2.5 times the interest expense.

The company’s stock traded at a 52-week low because (1) operating gross margins are down, (2) legal fees are up, and (3) unsurprisingly, perhaps, earnings per share are down to $0.92 as of the third quarter, compared to $1.70 last year.

But management’s explanations seemed reasonable to me. Management reported that polyester prices were up, that they had to produce from a pricier manufacturing plant, and that Hurricane Irma and Harvey affected U.S. demand. They further noted that the increase in legal fees was a non-cash expense. It was one-time reserve adjustment of $4.3 million related to development in outstanding product liability claims. 

It seemed like a normal business course of action to me. Besides, as I was reading the Q3- report, I was beginning to (financially) fall in love with the company. Here are a few love notes from the company’s financial statements: 

Annual revenue was $538 million in 2016 compared to $296 million in 2012; the 2016 profits were $76 million compared to $40 million five years prior. And management is thrifty on diluting its shareholders, a quality I admire. Shares outstanding are about 35 million compared to 33 million five years ago. Am I the only one getting goose bumps reading this?

As I was beginning to fall in love, I stopped myself and asked: what does Caesarstone even do? From where does it operate? Should I bring it into my life?

Here is what I learned in less than 15 minutes (they say to fall in love, you need less than 5 seconds, so I took my time!): Headquartered in Israel, the company was founded in 1987. It sells engineered quartz surfaces that management describes as high quality. (I wouldn’t know the difference between low and high quality quartz. I thought quartz was a word related to watches). In March 2012, its shares began to trade on Nasdaq.

The company sells its product in over 50 countries. 40% of its product is sold in Asia Pacific and 26% is sold in North America. And while quartz serves 15% of the world demand, solid surface and granite are 51% in comparison. The company has a 14% market share in the US, 45% in Australia; and over 85% in Israel. The bulls in us will read the prior sentence and say: “Ah! A lot more room to grow.”

So I bought a few shares in Caesarstone - not because I know much about the business - but because I am intrigued by it. I want to know what my dear friend, a 15-year veteran as a general contractor, Ron Wagner, is thinking about the use of quartz versus other solid surfaces. And what he thinks about Caesarstone’s quartz quality and price compared to its competitors.

I also want to know more about the industry. How dependent is it on the real estate market (my guess – very much)? Is there a strategy to hedge this sensitivity? Besides, it just so happens that the company is based out of Israel; specifically, two miles from the town in which I grew up, Ramat Hasharon.

I realize that my romantic purchase of Caesarstone may baffle the numbers-minded reader. So over the next six months, I will look more carefully at its income statement and balance sheet. And I will compare Caesarstone financials to its competitors.

For the story-minded reader, I plan to be in Israel in April and hope to visit the company headquarters. I hope that management will be gracious enough and let me tour its offices.

If you would like to be notified when I do, just click on the orange button on the top of this page.

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