Thursday, May 12, 2016

68th AIM Student Equity Update by Colin Canfieid. Caesarstone Sdot-Yam Ltd. (CSTE): “With Past Year in the Rearview Mirror - Is CSTE Ready to Rebound?

 Caesarstone Sdot-Yam Ltd. (CSTE, $37.59): “Company Remodeling: Is the Turnover a Plus?

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.


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.