Spruce Point Capital Management wants to alert our readers to a new research report on Caesarstone (Nasdaq: CSTE) by an independent firm called Viceroy Research, which was released earlier today. We believe this report strengthens our views that CSTE is at best a $15 stock.
- CSTE’s major revenue growth product, marketed as a collaboration with Lowe’s, is not for sale according to Lowe’s Customer Services and store checks. This is contrary sell-side forecasts highlighting this as a growth driver.
- Of CSTE’s listed sales agents, there is a growing percentage no longer sell (or have never sold) CSTE products, switching to higher margin products. Agents who sell CSTE are charging a higher retail price than consumers pay at IKEA for identical products. Ikea countertops include free installation!
- We believe CSTE’s inventory should be revised materially downwards to reflect decreasing average selling prices within their larger customers.
- SEC enquiries into CSTE revenue growth factors inconsistently addressed by management. The major revenue variance factor, increased average selling price, is not supported by channel checks which show prices decreasing at major customers/outlets.
- CSTE’s market analysis documents are illogical and over represent their poor market impact. In reality, the significance of growing competition in the USA goes unaddressed by CSTE. The market is extremely saturated with big players including Vadara Quartz, headed by the former CSTE USA division CEO Arik Tendler, and low-opex Asia-Pac players1 who can better compete on price for a virtually undifferentiated product.
- Competitor analysis suggests CSTE are either not maintaining machinery adequately or that machinery is severely underutilised.
- CSTE has consistently missed guidance; a theme we identify and is unlikely to change.
- Shareholder friendly programmes discontinued. CSTE is now a negative earnings growth vehicle with no payout policy.
1. Short Thesis
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The Chardan valuation is on a similar ‘Hollywood’ justification as other sellside analysts, including Stifel, who appear to have the most inconsistent valuation on a stock ever:
Earnings misses & downgrades, impromptu management changes, auditor concerns, quality concerns, increasingly competitive markets, and Kibbutz board backstabbing activism are apparently obscure concepts to Stifel, who simply provide a hindsight note after a major share price fall, then upgrade a few weeks later, all on the back of an obscure EV/EBITDA multiple.
On top of this, management embarrassingly had to revise its earnings dowwards on the back of accounting misstatements, an issue perhaps foreshadowed in Spruce Point pieces.
CSTE’s 20F4 states that the company “commenced offering our products and related services in several Lowe’s stores in the United States in the first quarter of 2017”. Management commented further on this development in the company’s Q1 earnings call5:
“We are already in around 200 stores in few of the states, that Lowe selected.”
It appears, that the company failed to inform Lowe’s of this latest development or CSTE lack the foresight to communicate with their end-customers effectively to any material sales.
Our channel checks with Lowes’s Customer Service confirm the Transform™ product is not available at Lowe’s stores as of the date of this report, nor is any other CSTE product.
Physical channel checks into Lowe’s stores and a review of their online catalogue confirms that no CSTE product is available for purchase at any Lowe’s store as of the date of this report. Meanwhile, Lowe’s is stocking what appears to be an increasing catalogue of products from CSTE competitors Silestone.
There are further concerns over the Transform™ product if it ever enters the market on a large scale basis. An experienced industry contractor has advised he would be hesitant to fit the product as the thin quartz layer is likely susceptible to wear and tear and cracking, and overlayed on top of old fittings, which are susceptible to rot and pungent stale water, causes smells near sinks6. The transform product is not a permanent solution.
The SEC issued a request for further information to clarify a number of ambiguous statements in CSTE’s 2015 20-F, specifically in regards to revenue movements (including FX and average selling prices) and aggregated operating segments.
Management’s address of revenue variance factors do not corroborate with our channel checks.
Increased average selling prices do not reflect ground level pricing, which we have found to be decreasing, and excessive volume increases do not correspond to the consensus of the CSTE reseller agents we contacted.
Caesarstone claim to have high quality products. Not only was this disproven by Sprucepoint Capital’s work7, but also now in CSTE’s own revenue growth and margins8. In CSTE’s own conference, management were unable to explain how the growth occurred. Management could not explain how there was an increase in Ikea sales.
CSTE’s statements about average selling prices are contradicted by their customers' advertised selling prices.
Between 2015 and 2017, CSTE's Ikea catalogue prices decreased by between ~3% and 15% (excluding enticements, and free installation!).
The reality is Ikea is suffering as a result of greater competition in the market place.
Silicosis – The cost of doing business!
Silicosis is an emerging risk in workers who process quartz and other silicon dust producing materials. This is an unknown variable for CSTE. Although provisions have been made for those claims filed, it’s noteworthy that there is a significant class action that could have a material impact on the company’s balance sheet, approximately, $56m.
There has been no provision for this $56m class action.
Quartz countertops are undoubtedly a market where competition is growing significantly. Price reductions are being seen in the range of 3-15% in IKEA alone. IKEA prices their stock at a 18%-35% discount to identical CSTE reseller retail prices.
With so many companies intending to compete within the marketplace, it is of additional concern that CSTE USA’s former CEO Arik Tendler has entered the market with a product who's marketing appears to address many of CSTE’s negative online reviews related highlighting quality concerns.
A comparative financial analysis against competitor Silestone reinforces our belief that Caesarstone’s financial statements are misrepresented. Specifically:
- Caesarstone’s marketing expenses are remarkably low, considering they allege to have over 10x distributors in the USA vs Silestone
- Caesarstone’s maintenance capex spending is substantially lower than Silestone, despite CSTE’s higher revenues and COGS
- Silestone’s margins (as a premium product) are 20% higher, suggesting less volume sold per unit of revenue and therefore lower wear & tear machinery expenses
- All quartz machinery (incl. frequent wear & tear replacement parts) is bought from niche group of suppliers with limited price variances.
Article by Spruce Point Capital Management
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