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Don't Be Fooled by Raven Industries' Recent Post-Earnings Plunge

Steve Symington, The Motley Fool

Raven Industries (NASDAQ: RAVN) announced mixed fiscal first-quarter 2019 results late last week, highlighting the continued fruits of both strategic investments aimed at driving growth and ongoing operational efficiency initiatives. But shares of the mini-industrial conglomerate fell more than 14% the following day as the market digested the news -- a move I believe is tied more than anything to the stock's recent steep ascent.

Now that the dust has settled, let's dig in to get a better idea of what drove Raven over the past few months and what investors should be watching in the coming quarters.

Raven Industries Aerostat blimp in the sky as seen from below.

IMAGE SOURCE: RAVEN INDUSTRIES

Raven Industries results: The raw numbers

Metric

Fiscal Q1 2019*

Fiscal Q1 2018

Year-Over-Year Growth

Revenue

$111.1 million

$93.5 million

18.8%

Net income

$22.1 million

$12.3 million

79.4%

Earnings per diluted share

$0.61

$0.34

79.4%

DATA SOURCE: RAVEN INDUSTRIES. *FOR THE QUARTER ENDED APRIL 30, 2018.

What happened with Raven Industries this quarter?

  • Raven's net income included a non-operating after-tax gain of $4.7 million, or $0.13 per share, related to the sale of its ownership stake in SST Software. It also included a charge of $3.7 million after taxes, or $0.10 per share, related to a previously announced gift to South Dakota State University, and $0.02 per share in expenses related to its Project Atlas strategic investment initiative, which was first unveiled last November.
  • Raven also saw a 12.8 percentage-point reduction in its effective tax rate, resulting in a tax benefit of $3.5 million, or $0.10 per diluted share. 
  • Even adjusted for one-time items, however, Raven's results were slightly above most investors' expectations for earnings of $0.49 per share.
  • Applied Technology segment revenue declined 0.1% year over year, to $40.4 million, once again in spite of persistently low commodity prices. Segment operating income grew 18.5%, to $15.9 million, led by lower warranty expenses and favorable legal recoveries.
  • Engineered Films segment revenue increased 37.7% year over year, to $60 million, driven -- as expected -- by continued strong sales of hurricane recovery film, which contributed $8.9 million, and Raven's acquisition of CLI, which contributed sales of $7.7 million. Segment operating income grew 51.3%, to $13.2 million, driven by sales leverage and strong operational execution.
  • Aerostar revenue grew 13.5%, to $10.9 million, driven by higher sales volumes from Raven's core Aerostar product lines. As the company suggested last quarter, Aerostar also sold its client private business during the quarter to hone its focus on core operations. Aerostar operating income doubled from the same year-ago period, to $2.8 million.

What management had to say

Raven Industries CEO Dan Rykhus insisted that all three business segments delivered "strong" operating results to start the fiscal year, adding:

Investments in growth are leading to increased demand, and operational execution is resulting in higher sales volume and improved financial performance. [...] The Company is off to a strong start to the year. Underlying organic growth in consolidated net sales and operating income were approximately 5 percent and 20 percent, respectively, when excluding unusual items. Each of the divisions is well positioned in its markets and we expect our positive momentum to continue.

Looking forward

Raven Industries once again declined to provide specific forward financial guidance. But Rykhus elaborated that Applied Technology is performing well, given its focus on innovation and international growth. On the latter, Applied Technology established its new Latin American headquarters in Brazil this quarter to drive growth in the "key" geography.

Meanwhile, he insisted Engineered Films' fundamental business remains solid and the segment should generate sales growth and profitability going forward as it leverages previous strategic investments in new capabilities. And at Aerostar, Raven believes stratospheric balloon systems "continue to build positive momentum and achieve key milestones" -- momentum that should be easier to maintain with its "sharpened" focus following the divestment of its client private business.

So why did shares decline so much in response to this report? For one thing, note that just prior to the release, Raven Industries stock had already rallied more than 40% from its 52-week low set in late August 2017. But apart from that, I see nothing not to like about Raven's performance to start the new fiscal year. And I think patient shareholders should be perfectly content holding Raven Industries stock.

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Steve Symington has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.