From rock star to bearish target: Caesarstone Sdot Yam

CAESARSTONE Sdot-Yam has been a rock star in the stock market, quadrupling in value since its initial public offering in 2012. Shortsellers are betting the streak is over.

Shares of the company, which makes quartz countertops, have failed to recover since plunging 26 percent on August 5 in New York, when it trimmed its 2015 sales forecast.

It tumbled another 8.8 percent to $45.02 (R583.25) last week after an investment firm said the Sdot-Yam, Israel-based firm was overstating its profit margins.

Caesarstone was being targeted by bearish investors after posting the slowest revenue growth on record in the second quarter, partly because its focus on affluent homeowners instead of more affordable buildings like apartments and condominiums meant it had missed out on growth in US housing, the firm said.

Investors are also concerned that new plants opening in North America this year would cut into margins until they reached full capacity, said Brian Bythrow, a money manager at Wasatch Advisors.

“There’s still growth, but growth has slowed,” said Bythrow, who helps oversee about $18 billion for Wasatch in South Bend, Indiana, including Caesarstone shares. “The multiple got ahead of itself.”

Caesarstone now trades at about 16 times 12-month future earnings, compared with an industry average of 22, according to data. Its valuation touched a ratio of 25 prior to its latest earnings report.

Bearish bets against Caesarstone rose to a more than two-year high of 2.9 percent of shares outstanding on August 17, compared with 0.1 percent a year ago, according to data compiled by Markit, a Londonbased research firm.

Short interest was at 2.6 percent on Thursday.

Chief executive Yos Shiran has navigated weak patches in the US housing market in the past by getting homeowners to choose his pricier quartz countertops over competing materials such as granite or marble when remodelling their homes.

The company cut its 2015 sales guidance to as low as $495 million compared with a previous estimate of as much as $525m. Revenue is forecast to rise 12 percent this year, less than half the 25 percent jump in 2014, according to the average estimate of five analysts surveyed. Currency headwinds had also cut into sales numbers, the company said.

The lower sales guidance prompted Barclays to downgrade the stock to the equivalent of hold from buy on August 5.

Limited upside

The company’s “valuation has already incorporated robust expectations for growth, and thus even a modest deceleration in US sales may limit the stock’s upside in the near term,” Barclays analyst Stephen Kim wrote in a research note.

Short-seller Spruce Point Capital Management said last week that Caesarstone was downplaying pricing pressures and overstating its margins. The report prompted a 7.1 percent drop in the stock that day.

“We stand by all of our previous public statements, regulatory filings and presentations,” the company said. “We believe in Caesarstone’s business and its opportunities.” – Bloomberg

The lower sales guidance prompted Barclays to downgrade the stock to hold.