Raven the Giant Killer?
Marshall is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Much like Jack slew the giant in the 18th century fairy tale, Raven Industries (NASDAQ: RAVN) is facing tough competition against other major diversified-products companies, including United Technologies (NYSE: UTX) and General Electric (NYSE: GE). The South Dakota-based company is a diversified producer of various products for the industrial, aerospace and construction markets.
Raven's key products are broken into three segments, with applied tech the leader. The segment includes precision agriculture products and information management. These products are in demand by growers who are looking to increase crop yields and lower costs.
Raven's engineered-films segment offers plastic sheeting for custom application in energy, industrial, construction and agricultural applications. Its other key segment, aerostar, produces military parachutes, uniforms and protective wear and other sewn and sealed products.
What makes it great
I love the stock for its 22% return on equity. Management is calling for earnings growth to return to historical levels in fiscal 2014, and the return of growth should be driven by new product development and international market penetration.
Sales came in at a record number for fiscal 2013 as applied-tech products were in high demand by the agricultural markets. The need for environmental and water- conservation projects in international and emerging markets is proving to be a sustainable long-term growth driver for the company.
Fundamentally driving the demand in emerging markets will be population and income growth in emerging economies. This increase in population will lead to an increased demand for food/water and an increased demand for food/water means more demand for Raven's products -- a beautifully virtuous circle.
The company is a solid cash-flow generator. It had around $50 million in cash at the end of fiscal 2013, and managed to return over $15 million to shareholders via dividend and buybacks throughout the year. The company also has no debt.
United Technologies is the aerospace and industrial conglomerate that includes the likes of Pratt & Whitney jet engines, Sikorsky helicopters, Otis elevators, and Carrier air conditioners. Although Raven has an aerospace segment, it fortunately doesn't compete with the likes of United. Back in 2012, the company bought up major aerospace competitor Goodrich.
The Goodrich acquisition is expected to help drive sales higher by 11% in 2013. Helping drive this includes the expected improvement in air traffic and travel. One of the other tailwinds for United should be a strengthening in residential construction. United is also looking to invest some $450 million in restructuring initiatives in 2013.
The other major industrial giant is General Electric. This company makes various jet engines and gas turbines, consumer appliances, railroad locomotives and medical equipment. GE's top segment is power and water, making up nearly 20% of total sales and 25% of operating income. The segment offers gas and steam turbines and generators; wind turbines and solar technology; and water treatment services.
The strength in the power segment is what should be one of the key drivers for the company. GE is targeting a 0.7 percentage point expansion in its operating margin for industrial products.
As of the end of 2Q, backlog was up to $223 billion from $216 billion during 1Q and $204 billion in 2Q 2012.
One of the big tailwinds for GE is the growing demand for energy production and fossil-fuel alternatives. The other beauty about GE is that 50% of its revenue is generated from emerging markets, i.e. selling power turbines to China. This should be a big growth market for the company going forward.
Raven isn't likely to catch United Tech and GE from a revenue-generating standpoint anytime soon. GE generates annual revenues of around $145 billion and United Tech $57 billion, compared to Raven's $400 million.
From a valuation perspective, the company trades at a 24 times P/E, which is near the top end of its five year P/E range of 11 times to 28 times. Both GE and United Tech trade below 20 times earnings.
But with Raven being smaller and more nimble, I think the company can easily shift its weight around, adjusting to market demand much more efficiently as compared to its major peers, thus, justifying the premium P/E. As well Raven has a 22% return on equity, which is inline with United but well above GE's 11.5%.
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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company. 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!