BUSINESS
Caesarstone Ltd., together with its subsidiaries, develops, manufactures, and markets engineered quartz and other surfaces under the Caesarstone brand in the United States, Australia, Canada, Latin America, Asia, Israel, Europe, the Middle East, and Africa. The company’s engineered quartz slabs are primarily used as indoor and outdoor kitchen countertops in the renovation and remodeling construction end markets. Its products are also used in other applications, such as vanity tops, wall panels, back splashes, floor tiles, stairs, furniture, and other interior and exterior surfaces that are used in various residential and non-residential applications. The company also offers porcelain products under the Lioli brand for flooring and cladding applications, as well as resells natural stones, various ancillary fabrication tools, and installation accessories; and sells sinks and materials.
INVESTMENT RATING
CSTE’s future returns on capital are forecasted to be in line with the cost of capital. Accordingly, the company is expected to continue to be Value Creation neutral.
Caesarstone has a current Value Trend Rating of C (Low Neutral).
With this rating, PTR’s two proprietary measures of a stock’s current attractiveness are providing contradictory signals. Caesarstone has a slightly positive Appreciation Score of 65 but a slightly negative Power Rating of 32, triggering the Low Neutral Value Trend Rating.
Caesarstone’s stock is selling well below targeted value. The current stock price of $4.48 compares to targeted value 12 months forward of $8.
This moderately high appreciation potential results in an appreciation score of 65 (only 35% of the universe has greater appreciation potential.)
Caesarstone has a Power Rating of 32. (This slightly negative Power Rating indicates that CSTE only has a better chance of achieving attractive investment performance over the near to intermediate term than 32% of companies in the universe.)
Factors contributing to this slightly negative Power Rating include: the Cut Stone and Stone Products comparison group is in an extremely unfavorable position currently; and recent price action has been unfavorable. An offsetting factor is the recent trend in CSTE’s earnings estimates has been extremely favorable.
INVESTMENT PROFILE
CSTE’s financial strength is average. Financial strength rating is 44.
Relative to the S&P 500 Composite, Caesarstone Ltd has significant Value characteristics; its appeal is likely to be to Capital Gain-oriented investors; the perception is that CSTE is normal risk. Relative weaknesses include: low historical profitability, low financial strength, low historical growth, and high earnings variability. CSTE’s valuation is high: low dividend yield, high P/E ratio, and low price/book ratio. CSTE has unusually low market capitalization.
CURRENT SIGNALS
Caesarstone’s current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; and falling leverage.
Caesarstone’s current technical position is very weak. The stock price is in a 5.1 month down move. The stock has declined 24.5% from its prior high. The stock price is below its 200 day moving average which is in a downtrend.
ALERTS
Marginal negative changes in Caesarstone Ltd (NASDAQ: CSTE) fundamentals have recently occurred: significant quarterly earnings deceleration occurred.
The stock is currently rated C.
Caesarstone Ltd (NASDAQ: CSTE) stock closed at $4.48 on 3/6/24 after a very large increase of 5.2%. Moreover, unusually high trading volume at 185% of normal accompanied the advance. The stock is unchanged during the last week but has been weak relative to the market over the last nine months.
CASH FLOW
In 2023, Caesarstone generated a very significant increase in cash of +$31.97 million (+54%). Sources of cash were much larger than uses. Cash consumed from 2023 EBITDA totaled -$10.11 million. Non-operating uses consumed -$46.26 million (+458% of EBITDA). Cash taxes consumed -$22.56 million (+223% of EBITDA). Withdrawal of investment from the business totaled +$165.49 million (-1637% of EBITDA). On a net basis, debt investors withdrew -$56.26 million (+557% of EBITDA) while equity investors supplied +$1.67 million (-16% of EBITDA).
Caesarstone’s Non-operating Income, %EBITDA has enjoyed a volatile overall uptrend over the period. This improvement was accompanied by stability for the Caesarstone Peer Group. In most years, Caesarstone was in the third quartile and lower quartile. Currently, Caesarstone is upper quartile at +458% of EBITDA (-$46.26 million).
Caesarstone’s Cash Taxes, %EBITDA enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Caesarstone Peer Group. (Since 2021 Cash Taxes, %EBITDA has accelerated very sharply.) In most years, Caesarstone was in the top quartile. Currently, Caesarstone is upper quartile at +223% of EBITDA (-$22.56 million).
Caesarstone’s Business Re-investment, %EBITDA has suffered a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Caesarstone Peer Group. In most years, Caesarstone was in the third quartile and lower quartile. Currently, Caesarstone is lower quartile at -1637% of EBITDA (+$165.49 million).
Caesarstone’s Debt Investors, %EBITDA has experienced a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Caesarstone Peer Group. In most years, Caesarstone was in the top quartile and second quartile. Currently, Caesarstone is upper quartile at +557% of EBITDA (-$56.26 million).
Caesarstone’s Equity Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Caesarstone Peer Group. In most years, Caesarstone was in the third quartile and second quartile. Currently, Caesarstone is substantially below median at -16% of EBITDA (+$1.67 million).
Caesarstone’s Change in Cash, %EBITDA has experienced a very strong overall downtrend over the period. This downtrend was accompanied by an opposite trend for the Caesarstone Peer Group. (Since 2019 Change in Cash, %EBITDA has accelerated very sharply.) In most years, Caesarstone was in the lower quartile and third quartile. Currently, Caesarstone is lower quartile at -316% of EBITDA (+$31.97 million).
Caesarstone’s Cash, %Revenue has exhibited little to no overall change over the period. This stability was accompanied by stability for the Caesarstone Peer Group as well. In most years, Caesarstone was in the second quartile and top quartile. Currently, Caesarstone is above median at +16%.
PROFITABILITY
Caesarstone’s return on equity has eroded very significantly since 2014. The current level is -34.2% versus the high of 24.4% and the low of -34.2%.
This very significant erosion was due to very strong negative trend in pretax operating return and little change in non-operating factors.
The productivity of Caesarstone’s assets declined over the full period 2014-2023: asset turnover has experienced a downtrend although it experienced a very sharp recovery after the 2020 low.
Reinforcing this trend, pretax margin experienced a very strong overall downtrend that accelerated very sharply from the 2021 level.
Non-operating factors (income taxes and financial leverage) had little influence on return on equity.
Caesarstone’s return on equity is lower quartile (-34.2%) for the four quarters ended December, 2023.
Operating performance (pretax return on assets) is lower quartile (-15.0%) reflecting asset turnover that is at the upper quartile (0.97X) and lower quartile pretax margin (-15.4%).
Tax “keep” rate (income tax management) is upper quartile (123.8%) resulting in after tax return on assets that is lower quartile.
Financial leverage (leverage) is at the lower quartile (1.84X).
GROWTH RATES
Overall, Caesarstone’s growth rate has slowed very considerably in recent years.
Caesarstone’s historical income statement growth and balance sheet growth have diverged. Revenue growth has paralleled asset growth; earnings growth has fallen short of equity growth.
Annual revenue growth has been 2.6% per year.
Total asset growth has been 3.5% per year. (More recently it has been -13.7%.)
Annual E.P.S. growth has been -27.8% per year.
Equity growth has been -0.6% per year. (More recently it has been -15.2%.)
No consensus growth rate forecast is available for Caesarstone.
Relative to the Caesarstone Peer Group, Caesarstone’s historical growth measures are erratic. Revenue growth (2.6%) has been at median. Total asset growth (3.5%) has been below median. E.P.S. growth (-27.8%) has been lower quartile. Equity growth (-0.6%) has been lower quartile.
Consensus growth forecast is unavailable.
PRICE HISTORY
Over the full time period, Caesarstone’s stock price performance has been volatile and significantly below market. Between May, 2013 and March, 2024, Caesarstone’s stock price fell -84%; relative to the market, this was a -95% loss. Significant price moves during the period: 1) May, 2021 – March, 2023: -75%; 2) April, 2017 – June, 2018: -62%; and 3) July, 2015 – September, 2015: -58%.
TOTAL INVESTMENT RETURNS
Current annual total return performance of -24.1% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through February, 2024 of -24.1% is lower quartile relative to Caesarstone Ltd Peer Group.
Current 5-year total return performance of -22.4% is lower quartile relative to the S&P 500 Composite.
Through February, 2024, with lower quartile current 5-year total return of -22.4% relative to S&P 500 Composite, Caesarstone’s total return performance is lower quartile relative to Caesarstone Ltd Peer Group.
VALUATION BENCHMARKS
Relative to S&P 500 Composite, CSTE’s overall valuation is exceptionally low. Ratio of enterprise value/assets is lower quartile. Price/equity ratio is lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
Relative to Caesarstone Peer Group, CSTE’s overall valuation is exceptionally low. Ratio of enterprise value/assets is lower quartile. Ratio of enterprise value/revenue is lower quartile. Price/equity ratio is lower quartile. Price/earnings ratio is unavailable. Ratio of enterprise value/earnings before interest and taxes is unavailable.
Caesarstone has a major value gap compared to the median. For CSTE to hit median valuation, its current ratio of enterprise value/revenue would have to rise from the current level of 0.46X to 1.10X. If CSTE’s ratio of enterprise value/revenue were to rise to 1.10X, its stock price would be higher by $11 to $15.
For CSTE to achieve upper quartile valuation relative to the Caesarstone Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 0.46X to 1.85X. If CSTE’s ratio of enterprise value/revenue were to rise to 1.85X, its stock price would increase by $24 from the current level of $4.48.
VALUE TARGETS
CSTE’s future returns on capital are forecasted to be in line with the cost of capital. Accordingly, the company is expected to continue to be Value Creation neutral.
Caesarstone’s current Price Target of $8 represents a +70% change from the current price of $4.48.
This moderately high appreciation potential results in an appreciation score of 65 (only 35% of the universe has greater appreciation potential.)
With this moderately high Appreciation Score of 65, the moderately low Power Rating of 32 results in an Value Trend Rating of C.
Caesarstone’s current Price Target is $8 (-20% from the 2023 Target of $10 but +70% from the 03/06/24 price of $4.48). This fall in the Target is the result of a -21% decrease in the equity base and a +1% increase in the price/equity multiple. The forecasted growth has no impact on the price/equity multiple and the forecasted flat return on equity has no impact either. However, the forecasted decline in cost of equity has a very slight positive impact.
PTR’s return on equity forecast is 4.0% — in line with our recent forecasts. Forecasted return on equity suffered a dramatic, steady decline between 2015 and 2023. The current forecast is significantly below the 2015 peak of 22%.
PTR’s growth forecast is 0.0% — in line with our recent forecasts. Forecasted growth suffered a dramatic, erratic decline between 2015 and 2023. The current forecast is significantly below the 2017 peak of 12%.
PTR’s cost of equity forecast is 3.9% — in line with recent levels. Forecasted cost of equity enjoyed a dramatic, steady decline between 2015 and 2023. The current forecast is well below the 2015 peak of 10.7%.
At Caesarstone’s current price of $4.48, investors are placing a negative value of $-3 on its future investments. This view is not supported by the company’s most recent performance that reflected a growth rate of 0.0% per year, and a return on equity of 4.0% versus a cost of equity of 3.9%.
PTR’s 2025 Price Target of $8 is based on these forecasts and reflects an estimated value of existing assets of $6 and a value of future investments of $2.
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