By:
Colin Canfield, AIM student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• Caesarstone Sdot-Yam Ltd., (NYSE:CSTE) together with its
subsidiaries, manufactures and sells engineered quartz surfaces under the
Caesarstone brand in the United States, Australia, Canada, Israel, Europe, and
internationally.
• After a year of
overture over poor corporate governance, CSTE’s board looks to finally change
in the fact of a sale by the Sdot-Yam kibutz.
• With a roughly 33%
stake, investors have weathered numerous proxy fights over the past three years
despite continued selling by the kibutz.
• On a top down level,
the company looks to continue to benefit from the continue rebound in global
real estate market combined with consumer preferences for higher quality,
quartz countertops.
• With a healthy balance
sheet and diversified production facilities, CSTE investors can be optimistic
about the prospects of future gains given the right changes in corporate
governance.
Key
points: As continued housing market strength looks to provide
significant tailwinds for CSTE for a variety of reasons, shareholders have
still held reservations about the company due to an above average number of
proxy conflicts among Board members and the Sdot-Yam kibbutz.
On a macroeconomic level,
housing builds have continued to see underlying strength built on steady,
albeit below average growth. For many of these new housing builds, homeowners
desire updated amenities for kitchens and bathrooms such as stainless
appliances as well as, more importantly, quartz and granite countertops. In
addition, the stronger underlying driver here is not the new builds, but rather
renovations of existing homes where firms are coming into older, pre-war
buildings and doing these renovations in an attempt to improve home value.
Zooming into the company
level, AIM looks at the proxy conflicts present within CSTE’s board and see a
real issue of contention. With the Sdot-Yam kibbutz historically owning a
significant stake in the company, they have reduced their ownership to the 33%
level as proxy conflicts have taken their toll on their resolve to run the
company. In effect, as shareholder representatives look to streamline the
company’s core competencies, it has come at a cost to both the company as well
as the owners.
What
has the stock done lately?
Over the course of 2016
and even looking back over a six month period, stock performance has continued
to decline with shares declining 9% and growing 16% for each respective period.
Combined with the proxy conflicts, investor sentiment concerning the continued
rebound of global housing markets has begun to shift away from the unbridled
optimism it once held towards pessimism.
Past
Year Performance: On a yearly basis, the stock has declined
-36.8% mainly due to issues inherent within CSTE’s corporate governance. While
investors have viewed rumors of Sdot-Yam leaving the company in a favorable
light, the fact remains that they have become jaded due to the constant
infighting over the last year.
Source: FactSet
My
Takeaway
Looking ahead to the
future, I believe the Sdot-Yam’s exit from the firm will provide a boon to
investor returns as it will allow the company to refocus its energy on not only
positioning itself in housing markets where demand for premium kitchen
materials will be strong, but it can also continue to focus on reducing the
costs of its operations. If AIM can find another way to play the growth of
premium kitchen materials, it certainly warrants looking at given the past
year’s issues, but it seems like the worst has passed for the quartz countertop
producer.
