Technology Sector Ideas

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Raven Industries -- >>> This Small Company Is a Good Long-Term Investment



By Anh HOANG

April 2, 2013

Tickers: DE, GGG, RAVN


http://beta.fool.com/hoangquocanh/2013/04/02/this-small-company-is-a-good-long-term-investment/28551/?source=eogyholnk0000001



In a recent Forbes list of 100 America’s Best Small Companies, there is one conglomerate that impressed me with its growing and consistent historical operating performance. In the past ten years, this company has consistently delivered double-digit return on invested capital. Moreover, it has increased dividends overtime.

The company in question is Raven Industries (NASDAQ: RAVN). Let’s take a closer look to check whether or not we should invest in this company now.

Business snapshot

Raven is a diversified technology company providing different products to customers in different sectors, including agriculture, energy, construction, and military, operating in three main business divisions: Applied Technology, Engineered Films, and Aerostar.

The Applied Technology division supplies innovative precision agriculture products and information management tools to help growers reduce costs and improve farm yield. Engineered Films division makes high-performance plastic films for industrial, energy, and agricultural applications, while the products of Aerostar are high-altitude research balloons and radar processing systems mainly to government agencies.

The majority of its sales, $171.8 million or 42.3% of total 2012 revenue, were generated from the Applied Technology division. The Engineered Films division ranked second with $142 million in total revenue, while the Aerostar division generated $102 million in sales. Its biggest customer, West Texas Plastics Limited, accounted for 11% of total sales in 2012.

Consistently growing operating performance

In the past ten years, Raven has managed to consistently grow both its top line and bottom line. Revenue increased from $143 million in 2003 to $406 million in 2012, while net income rose from $14 million, or $0.38 per share to $53 million, or $1.44 per share during the same period.

In addition, Raven has paid increasing dividends over time, from only $0.09 per share to $0.42 per share in the past ten years. Even with the increasing dividends, the company has kept the payout ratio at a conservative level, in the range of 22.7% to 34.8%. Furthermore, the company has generated double-digit return on invested capital since 2003, fluctuating in the range of 22% to 31.4%. In 2012, its ROIC stayed at 26.15%.

Interestingly, Raven has managed to deliver growing operating performance without the help of leverage. As of January 2013, the company had $221 million in total stockholders’ equity, $49 million in cash, and no debt. It recorded only $8 million in pensions and other benefits.

The most profitable company

At around $33 per share, Raven is worth $1.2 billion on the stock market. The market values the company at as much as 12.6 times EV/EBITDA. Compared to its peers, including Graco (NYSE: GGG) and Deere & Company (NYSE: DE), Raven is the smallest.

Graco is trading at nearly $58 per share, with a total market cap of $3.5 billion. It has a valuation equivalent to Raven’s at 12.6 times EV/EBITDA. Deere is the biggest company among the three, with around $33.5 billion in total market cap. At around $85 per share, Deere is valued at 10.5 times EV/EBITDA.

Among the three, Graco has the highest operating margin at 24.5%. Raven ranked second with 19.1%, while the operating margin of Deere is the lowest at 13.5%. However, as Graco has a much lower asset turnover than Raven, its return on invested capital is also much lower, at 16.5%. Deere has the lowest ROIC among the three, at only 7.15%. In terms of dividend yield, Deere is the winner with the highest dividend yield at 2.3%, while the dividend yields of Raven and Graco are 1.3% and 1.7%, respectively.

My Foolish take

With its growing and consistent historical performance, debt-free operation, and the highest return on invested capital, Raven seems to be a stock to hold in the long run. I personally think at its current price, the stock is fairly valued, and it is a much better buy among its peers now.

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