Are Shares of This Small-Cap Dividend Aristocrat Set to Soar?

Perhaps the question should be reset: Not that Raven Industries (NASDAQ: RAVN), the dividend aristocrat in question, shares are set to soar, but will they continue to soar? Raven Industries shares are up 40% year to date.fertilizer-stock

If you’re unfamiliar with the name Raven Industries, you’ve got plenty of company. Raven Industries is a smallish company, with an $800-million market cap. It’s headquartered off the beaten path, in Sioux Falls, S.D. Wall Street coverage is virtually nonexistent.

What’s more, the business hardly titillates. The business is as unglamorous as the city in which it is domiciled. Raven Industries is a diversified manufacturer of agriculture equipment, industrial coverings, and engineered films. These are hardly business subjects to ignite cocktail-party chatter.

Raven Industries Dividend

That said, I’m more drawn to the unglamorous than repelled by it. An unglamorous disposition tends to promote conservative values. Debt, the magic elixir of politicians and central bankers everywhere, is used judiciously or altogether eschewed by the somber, serious business types that gravitate toward unglamorous businesses. Raven Industries’ management is no exception. The company carries no long-term debt; it maintains a very liquid capital structure: Current assets exceed current liabilities by a factor of five.

Low debt and high liquidity have enabled Raven Industries to pay a continual quarterly dividend since 1972. Nearly all those years have produced a dividend increase.

More than anything, low debt and high liquidity enables a business to endure cyclicality. Raven Industries’ businesses are solid businesses. They have all displayed solid long-term growth, but they’re also cyclical businesses. The long-term trend is up, but the trend has hardly been linear.

Though Raven Industries shares are up 40% for the year, they’re still only half way to their peak of $42 set in December 2013. Since then, they’ve taken a Six Flags roller-coaster ride down to $13 before ratcheting back to the current $22 share price.

A Cyclical Company With Cyclical Customers

Raven Industries is a cyclical company because it caters to cyclical customers, namely agriculture and energy companies. Raven Industries’ revenue and operating income have mostly ebbed over the past three years. Revenue posted at $406 million in 2013; operating income posted at $78 million. Over the trailing 12 months, revenue posted at $257 million; operating income posted at $12 million.

But signs point to an ebb soon giving way to a flow.

Many commodities have trended higher this year. Oil and corn prices matter to many of Raven Industries’ customers. At the start of the year, oil was priced at below $30/barrel; today it’s priced above $45/barrel. Corn was priced below $3/bushel to start the year; today, it’s priced near $3.40/bushel.

Rising commodity prices will motivate Raven Industries’ customers to raise CAPEX budgets. To wit, agriculture equipment giant Deere (NYSE: DE) recently decided to incorporate Raven Industries’ next-generation rate control technology into its aftermarket product offerings. The precision agriculture division, the division responsible for the new technology Deere has incorporated, was the bright spot in Raven Industries’ latest quarterly report. Revenue was up 13.2% year-over-year; profit margins expanded 2.5%.

More encouraging yet, the important aggregated quarterly numbers were up year over year, which surprised most analysts: Quarterly revenue increased 0.8% to $68 million, while EPS increased 9.1% to $0.12. Raven Industries shares popped 12% after the quarterly numbers were reported last month.

Raven Industries further buoyed investor confidence by offering positive financial guidance. Company CEO Daniel Rykhus provided few specifics, but he did offer a resounding generality. Said Rykhus, “All things considered, on a consolidated basis, we expect to exceed prior year sales and adjusted operating income in fiscal-year 2017.”

Yes, this is hardly high-school-cheerleader stuff, unless the high school is named after Ayn Rand. But for conservative Raven Industries, that’s about as rah-rah as it gets.

The fact is, though, that Raven still wallows in the ebb of its business cycle. Why not wait until the flow fully gushes before investing?

Because then it will be too late. Timing is everything with cyclicals. You want to buy when the business ebbs. When revenue and operating income drop, so does the share price – the desired entry point. When the business shifts to a fully gushing flow, the share price will have long ago flowed to a higher plane.

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Published by Wyatt Investment Research at