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Raven (RAVN) Gains From Innovation & Lower Taxes, Costs Rise


Raven Industries, Inc.’s RAVN updated research report was issued on Dec 3, 2018.

This Zacks Rank #3 (Hold) stock is poised to grow on the back of stronger innovation, market share gains, strategic contracts, ongoing growth investment projects and lower tax expenses. However, lower prices of agricultural products and escalating cost remain two key causes of concern for the company.

Inside Story

Raven perceives that the growing popularity of innovative products like RS1, ongoing investments within the Applied Technology segment (for expanding Latin American business footprint), receipt of the new $36.2-million contract within Aerostar business (Oct 3, 2018) and superior customer relationships will aid the company to boost revenues in the quarters ahead.

The company’s adjusted earnings improved 9.1% year over year in third-quarter fiscal 2019 (ended Oct 31, 2018). The upswing was driven by lower effective tax rate (on account of the December Tax Cuts and Jobs Act) and favorable discrete tax items. These factors jointly lowered Raven’s tax expenses by approximately $3.4 million in the fiscal third quarter. We believe that these positives will continue to drive the company’s bottom line in the quarters ahead. Per the Zacks Consensus Estimate, Raven’s year-over-year earnings growth is currently pegged at 39.5% for fiscal 2019 (ended January 2019).

Despite these positives, Raven’s stock has lost 16.9% over the past three months, wider than 9.9% decline recorded by the industry it belongs to.

Notably, rising cost has become a major cause of concern for Raven. In fiscal third-quarter 2019, the company’s margins were significantly hurt due to material cost inflation (on account of tariffs imposed on import of certain inputs like aluminum, steel, electrical components and fiber), project Atlas-related spending, new enterprise resource planning implementation and cost overruns on a massive geomembrane fitting project. These factors might continue to flare up costs and hurt Raven’s near-term margins. Moreover, weaker hurricane recovery film sales volumes might add to the woes.

From an external market view, weak agricultural product prices are currently straining Raven’s top line. The global agricultural market is at its fifth year of low profitability. Inadequate income of farmers is currently hurting the demand for agricultural products, thereby depressing its prices in the market. The downside in input costs has yet not led to a notable impact on farmers’ earnings. Raven believes that low commodity prices in the agricultural market will continue to unfavorably impact revenues in the next 12-18 months. Moreover, ongoing decline in oil prices, if persists, might hurt the company’s near-term quarterly performances.

Even so, on a Price/Earnings(TTM) basis, Raven’s stock looks overvalued compared with its industry, with respective tallies of 27.0x and 17.5x in the past three-month period.

Stocks to Consider

Some better-ranked stocks within the same space are listed below:

Crane Co. CR holds a Zacks Rank #2 (Buy). The company pulled off average positive earnings surprise of 5.04% in the past four quarters. You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Federal Signal Corporation FSS also carries a Zacks Rank of 2. The company pulled off average positive earnings surprise of 21.18% in the trailing four quarters.

ITT Inc. ITT is another Zacks Rank #2 stock. The company delivered average positive earnings surprise of 5.72% in the past four quarters.

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