Is Raven Industries Stock Set to Fly Higher?

As in the classic Edgar Allan Poe poem "The Raven" when the main character is feeling low, Raven Industries (NASDAQ:RAVN) stock descended ahead of this week's earnings report. After climbing above $45 last week, Raven has dropped down to the mid-$30's.

The move appears to be the tale of a pre-earnings selloff rather than any sort of fundamental flaw. Nevertheless, this has left some wondering—is the magical run off the March 2020 bottom over, or will Raven Industries soon find love again from investors?

What Does Raven Industries Do?

Based in South Dakota, Raven Industries operates under three segments—Applied Technology, Engineered Films, and Raven Aerostar. Its core business provides technology-based solutions for farmers that help get the most out of their harvests. Using wireless technology, its computer devices help steer farming equipment through the field to get a precise result and save growers money in the process. The systems also communicate with the folks indoors providing real-time data to the farm's command post.

The Engineered Films unit also resides in the farming space. It sells flexible films and sheeting to protect crops from adverse weather and unwelcomed pests. While the main application for the polymer films is agriculture, but they are also used for oilfield linings as well as various construction, industrial, and environmental purposes.

Last, Raven Aerostar serves the high-altitude platforms (HAP) market, a unique market that plays a supporting role in critical space and government defense projects. The division provides lightweight, high-altitude balloons and radar systems that enable long-duration space missions and radar communications. This is a smaller part of the business but may not be for much longer. Credence Research estimates that the global HAP market will grow at a 9.5% rate and reach $5.2 billion by next year as more governments and companies invest in things like unmanned aerial vehicles (UAV) for defense and commercial purposes.

How Were Raven Industries' Q4 Results?

Going into the FY21 fourth-quarter report, analysts were expecting earnings per share (EPS) of $0.15 on revenue of $88.7 million. Raven Industries reported a 6.6% decrease in revenue to $80.1 million that was driven by sales declines in the Engineered Films and Aerostar units. This outweighed growth in the Applied Technology business.

The effects of the pandemic drove the setback in the Engineered Film segment as customers in both agriculture and non-agriculture markets in paused spending in an uncertain economic landscape. Unfavorable timing on government contracts was the culprit in Raven Aerostar.

The company eked out a profit of $0.01 per share that not only fell below the Street but marked a significant dip from last year's $0.09 per share profit. However, not including the investment in Raven Autonomy, EPS would have come in at a much better $0.10. The investment may be well worth it in the long run. Raven Autonomy is the company's driverless farm equipment platform designed to revolutionize the productivity and safety of farming professionals.

While disappointing, the worse than expected fourth-quarter performance is not cause for alarm. The lingering effects of COVID-19 on end-customer demand should soon dissipate. More importantly, the core Applied Technology business saw improved fundamentals in posting 6% sales growth. As sentiment around an agriculture industry rebirth continues to improve Raven Industries should produce some stronger performances in fiscal 2022. Management credited increasing commodity prices as the reason behind "optimism in the ag market for the first time in nearly a decade."

 Is Raven Industries Stock a Buy?

Despite the recent downturn, shares of Raven Industries are within striking distance of their 2018 record high around $50. And $50 is exactly the target price that research firm Lake Street gave to the stock when it initiated coverage last week with a 'buy' rating.

Whether Raven can soar 40% to this target will largely depend on the success of its penetration into autonomous agriculture. The company plans to develop autonomous machinery for large-scale farming. This is a growth market that is expected to see a major technological revolution this decade. There will be plenty of competitors in this market including big players like Deere & Company, but Raven's unique offerings and relationships in the agriculture market could yield it a significant share.

In the meantime, Raven Industries should benefit from its roots in space exploration as a supplier of stratospheric research balloons for the American space program. Today, however, the opportunities go well beyond NASA. In a world where drones are increasingly being used for anything from defense missions to consumer package delivery, the need for Raven's technology should remain 'high'.

This makes Raven Industries stock a great play on both agricultural technology (i.e., finding ways to more efficiently feed a growing global population) and HAP technology. And is reason for long-term investors not to fret about finding the perfect entry point.

The stock is not cheap at nearly 40x forward earnings. In hindsight, it may have plowed too far ahead on enthusiasm towards its near-term growth opportunities. But over time, as the smart agriculture and space technology themes play out, Raven Industries stock could be headed to the stratosphere. This makes the recent correction a great time for investors to harvest a position.