This Company Is Guiding Investors to Profits

Josh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

With the world's population exploding from 3 billion people to 7 billion people in just over 50 years, reliable crop production has never been more important.  From the planting and harvesting of crops, to the distribution of them to those in need, many companies are taking part in making the world a better, more efficient place.  While companies with this greater good in mind should be applauded, not all make truly great investments.  Despite their good intentions, they may simply be too expensive, or working on a project that may not be profitable for the long-term.  However, I believe one challenge solving company is trading at a discount to its future growth runways and that is Raven Industries (NASDAQ: RAVN).

Raven Industries:  An overview

Raven Industries, the Sioux Falls based manufacturing company, sees itself as a "challenge solving company," as its CEO Daniel Rykhus explains.  With their 3 business segments each representing a vision for the greater good of society, they have laid out an approach to helping make the world a better place.  In its biggest segment, Applied Technologies, Raven focuses on fighting hunger by increasing yields for farmers through their Precision Agriculture guidance products.  Similarly, with its Engineered Films segment, the company aims for safer energy and a protected environment and water supply.  Finally, with its Aerostar segment, Raven aims for military safety as it works with the US government on research balloons, parachutes, and even protective wear for soldiers.

While all of these products are great for society, are they good for investors?  Let's take a look.

Applied Technologies

In what is perhaps their most important segment, Raven has carved out a highly profitable niche in the Precision Ag industry.  Posting Operating Margins of 35% and accounting for 38% of company revenue, their Applied Technologies is the most profitable and largest portion of their business. However, facing strong competition from the dominant Deere & Co. (NYSE: DE) and the rapidly expanding Trimble Navigation (NASDAQ: TRMB), the folks at Raven definitely have their hands full.  

While Deere and Trimble may have a size advantage, it is Raven that is able to boast the best operating margin of the group.  With a business-wide operating margin of 19% and the previously mentioned 35% operating margin in the Applied Technologies segment, Raven is able to top both Deere and Trimble as they post OM's of 13% and 11%, respectively.  Furthermore, as they look to expand deeper into South America, Europe, South Africa, and Canada, the company's international sales still only account for 1/4th of the segment's Revenues.  

Meanwhile, in the Trimble Navigation camp, Raven Industries sees a competitor who is more of a pure play in the GPS locating space.  Despite having 4 business segments of their own, Trimble is entirely reliant upon GPS and GPS accessories and solutions.  With the GPS and Precision Ag industries booming, an immediate downturn does not seem likely, but Trimble has very little diversification nonetheless.  Aside from that, they currently trade with a P/E of over 40, despite the fact that it took 8 years for them to double their EPS from $0.75 to $1.47 in the TTM.  

While Trimble may be the true growth play of the industry, I believe that Deere & Co.'s and Raven's diversification is what makes them more appealing options, particularly Raven Industries.

Engineered Films

Raven's second most profitable segment is its Engineered Films line, which posted a 19% operating margin and accounted for 35% of company revenue.  Providing reinforced plastic sheeting for a variety of applications, the company's geomembrane film is another socially thoughtful product as it helps line ponds and other wetlands for farmers, parks, or even golf courses.  While competition usually comes from private firms in this segment, it does face one powerhouse in Dow Chemicals, as they share a fairly similar line of film products.  Based upon Raven's historical performance, and their 9 months ended results in 2012 that saw sales up 14% and profits up 38%, the market appears to be more than large enough for the two publicly traded companies.


In their final business segment, Raven Industries demonstrates its challenge solving ability on the safety side of things.  By creating aerostats and radar systems, they are able to help monitor the skies in a variety of formats, from military uses to research balloons for Felix Baumgartner's jump from space.  Furthermore, the company also produces many military-based products and is a solutions manager for electronic manufacturing services.

Battling for contracts, this is Raven's least profitable and smallest portion of their business with an operating margin of only 10%.  Facing competition from a wide number of businesses such as Lockheed Martin (NYSE: LMT)Raytheon, and a number of other firms, Raven is one of the smallest of the group.  However, with TCOM's recent $15 million Afghan blimp contract, it is apparent that the government is willing to look for options outside of the usual major contractors. 

With Lockheed Martin's low margins, which includes an operating margin of 9%, Raven is able to separate itself from the field with its diversification, finding more stability than most defense contractors.  Seeing possible defense cuts looming ahead, I find Raven's diversification more appealing than a true play in the defense sector.

Where's the upside?

<table> <tbody> <tr> <td><strong>Company</strong></td> <td><strong>P/E & FP/E</strong></td> <td><strong>P/CF</strong></td> <td><strong>10 Yr Rev. Growth</strong></td> <td><strong>10 Yr EPS Growth</strong></td> <td><strong>Dividend %</strong></td> <td><strong>10 Yr P/E Avg</strong></td> </tr> <tr> <td><strong>Raven Industries</strong></td> <td>19.4/17.2</td> <td>15.7</td> <td>11.2%</td> <td>14.3%</td> <td>1.5%</td> <td>21.0</td> </tr> <tr> <td><strong>Deere and Co.</strong></td> <td>12.4/10.8</td> <td>9.0</td> <td>6.1%</td> <td>10.6%</td> <td>1.9%</td> <td>15.3</td> </tr> <tr> <td><strong>Trimble Navigation</strong></td> <td>43.0/20.4</td> <td>25.0</td> <td>13.7%</td> <td>14.2%</td> <td>0%</td> <td>34.7</td> </tr> <tr> <td><strong>Lockheed Martin</strong></td> <td>10.6/9.8</td> <td>7.4</td> <td>4.0%</td> <td>14.1%</td> <td>5.1%</td> <td>12.7</td> </tr> </tbody> </table>

Posting similar Revenue and EPS Growth rates as Trimble over the last decade, while paying out a dividend, and sporting a PE that is below its 10 year average, I can't help but see Raven as a great company at a fair price.  Similarly, Deere & Co. is trading at a large discount to its averages over the last decade, which triggered an investment from Mr. Buffett himself and an outperform CAPS call from yours truly.  Meanwhile, with Lockheed Martin, the effects of the market's uneasiness on possible defense cuts are blatantly evident as they are the cheapest company of the group.  Boasting a huge dividend of 5.1% they represent a great potential value pick, but I'd like to see what happens with the cuts before I made a call on them.  

Targeting 10-15% growth in revenue and EPS annually, Raven may fall a little short in 2012, but has proven to be right on pace over the last decade.  Furthermore, with their 26th consecutive year of a dividend increase, the company's policy of using 30% of free cash flow to pay out dividends has been a huge success.  By holding the other 70% back, they are able to invest in acquisitions, R&D, and even stock repurchases as they move forward, all while maintaining a safe Payout Ratio.

The Foolish bottom line

All in all, I believe Raven's diversification is what makes it a truly appealing pick, as each segment helps solve major challenges facing today's society.  With their high margin Applied Technology segment and steady Films and Aerostar businesses, the company is able to generate 10-15% growth year after year.

While it may not be the explosive pick that Tremble Navigation could be, or the dominant powerhouse that Deere & Co. is, Raven is a quality long-term outperformer and I will be happy to take their steady growth and dividend payments for years to come.

joryko has no position in any stocks mentioned. The Motley Fool owns shares of Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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