Monday, August 24, 2015

Has Caesarstone Caused its Own Misfortune by Ignoring Fabricators?

Caesarstone, founded in 1987, is based in Israel and has a large U.S. division headquartered in Van Nuys, Calif. It is known as one of the pioneers of quartz surfacing because of the patented Bretonstone process. It is the only publicly-traded stock for a company exclusively dealing in quartz surfacing. Its stock is traded on the NASDAQ as Caesarstone Sdot-Yam Ltd. (CSTE). After its stock plummeted by more than 25 percent this month, most of which occurred on two key days: August 5 and August 19, Caesarstone has been making big news in the world of finance. This has left many countertop industry professionals wondering whether the company’s business model, which practically ignores fabricators roles in the sales equation, is to blame.
In May, the company opened its first quartz surfacing manufacturing plant in the U.S. just outside of Savannah, Ga., and it includes some of the most advanced technology available for producing engineered stone, as well as a showroom/”community center” for displays, events and meetings.Overall, the last year seems to have been one of the company’s best to date. However, much of the company’s recent success is attributed to a 2013 deal in which Caesarstone partnered with Ikea US as the exclusive supplier of non-laminate countertops in its retail stores.

Second Quarter Financials Released

Caesarstone stock hit an all-time high on July 31, 2015,  when it closed at about $72 per share after remaining in the $60s range for most of the year. On Aug. 5, the company released its Q2 2015 financial statements . The stock had already dropped by more than 6 points by the time the market opened in the United States. At the end of the day it was down by more than 25 percent at 52.57 with 3.6 million shares having changed hands. The stock closed even lower at 49.59 after another heavy day of trading on August 6.
On the surface, the results of the Q2 2015 financial report do not seem too bad:
  • Revenue increased by 9.9 percent to a new high of $127.5 million.
  • S. revenue increased by 19.2 percent to $57.1 million.
  • Diluted earnings per share (EPS) rose by 27.5 percent to $0.65.
“We are pleased to report another quarter of solid financial results,” said Caesarstone CEO Yosef Shiran when the Q2 financials were released. “Each of our major markets is healthy, even with the headwinds from currency exchange rates, and continues to present significant opportunities. We look forward to capturing those opportunities to continue driving long-term growth and value for our shareholders.”
A snapshot of Caesarstone stock performance over the last 30 days

A snapshot of Caesarstone stock performance over the last 30 days. Click this image to see a larger, more readable version.

After the stock price plummeted, financial analysts pointed out that top-line results were much lower than expected. Even though revenue increased to $127.5 million, investors were expecting it to be closer to $134.2 million, and management had cut revenue guidance by $20 million to a maximum of $505 million while analysts had projected the figure to be $521.5 million. Travis Hoium of the well-known Motley Fool stock-centric media outlet explained the drop in stock price to be a result of expectations getting ahead of performance, claiming there is “nothing to panic about for long-term investors.”

Caesarstone Under Attack

Caestarstone stock remained in the low 50s for the next two weeks, but on August 19, Spruce Point Capital Management, LLC., a prominent market-research firm, issued a scathing 54-page report accusing the company of lying about the quality of its quartz countertops, manufacturing substandard products,  and propping itself up on an unstable business model.
In the report Spruce Point states its belief that Caesarstone will continue to miss its goals to grow sales by 15 percent and that rising competition in the quartz surfacing industry will make it difficult for the company to maintain its share of the market. The firm also notes that Caesarstone’s controlling shareholder has reduced its ownership from 79 percent to 32.6 percent.
Spruce Point estimated the true value of Caesarstone stock to be in the range of $15 per share, which is 79 percent lower than its July 31 high. The firm had Caesarstone quartz surfacing independently analyzed, and it claims the product contains less quartz than advertised, so rather than demanding a premium price, the company should be selling at a discount, according to Spruce Point.
Caesarstone stock plummeted again shortly after this report was released,  this time to $39.77, the lowest it has been since October 2013. It had regained a couple of points to close at $44.61 by the end of the day.

Caesarstone Issues Weak Response

Caesarstone responded to the attack the following day, stating that the Spruce Point report is misleading, includes inaccuracies and draws false conclusions.
“We stand by all of our previous public statements, regulatory filings and presentations,” said Shiran. “We are proud of the honesty and integrity with which we have operated our business and categorically reject any suggestion to the contrary.”
“We are a strong company with a powerful brand that produces high-quality and innovative products through an efficient operation and state-of-the-art infrastructure,” Shiran continued. “This has enabled us to consistently produce excellent business and financial results and we believe in the Company’s capability to continue to do so.”

Fabricators Influence Countertop Selection

We here at believe that  by limiting fabricators’ roles in its business model, Caesarstone may have pushed itself off a cliff. The company has historically relied heavily on celebrity endorsements and its exclusive contract with Ikea. While the company does work with spec reps, architects and designers, some claim it has seemed to largely ignore the fabricator.
According to the results of our 2015 Countertop Survey, the furthest reaching of its kind, our audience agrees that fabricators are influential in the decision-making process. Caesarstone’s largest competitors, Cambria, Cosentino and DuPont, all work closely with fabricators.
In our recent industry survey, that received more than 500 responses, we asked, “How much influence do you feel fabricators have over what materials their customers choose for their countertop purchases.” 
Respondents had this to say:
  • 3.4 percent said fabricators just sell customers what they ask for.
  • 14.1 percent said fabricators have a little influence over what countertop materials their customers buy but mostly just sell them what they ask for.
  • 28.9 percent said the influence of a fabricator can sometimes sway what countertop material is used.
  • 26.2 percent said the influence of a fabricator can often sway what countertop material is selected by a customer.
  • 26.5 percent said fabricators have great influence over what countertop materials a customer chooses.
  • 1 percent said customers will almost always choose the material that the fabricator suggests.
Nearly 83 percent of respondents believe that fabricators are important to the decision-making process when it comes to material selection according to these results. Our opinion as an organization joins others that believe ignoring this may be adversely affecting Caesarstone, and any other company who fails to take the role of the fabricator into account. However, it may also be something more, as we have discovered the company has an F rating with the Better Business Bureau, an organization most companies do all they can to appease.
What do you think? Let us know in the comments below, or drop me a line at

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