Credit: Shutterstock photoT he U.S. isn't called a developed nation for nothing.
In consumer products and services, from cars to credit cards, America has high market share.
But when it comes to quartz countertops, the U.S. is behind the rest of the developed world.
Engineered quartz accounts for just 8% of all countertops in America, according to industry tallies. In contrast, quartz penetration rates in Europe and Australia range from 30% to 50%, note JPMorgan analysts.
The U.S. market for quartz, said the analysts in a recent report, "is one of the least-penetrated developed markets in the world."
Countertop kings in America remain granite and other solid surfaces. Even laminate garners more share than quartz.
But awareness for quartz's fine points -- its beauty and durability, to name two -- is building.
One of the biggest promoters isCaesarstone ( CSTE ), the Israeli quartz manufacturer. Nearly 60% of its operating expenses go toward marketing and selling quartz. In the first nine months of 2014, that came to more than $41 million.
Taking a high-low marketing approach, Caesarstone has been targeting designers and architects for inclusion in their high-end kitchen and bath projects.
On the value end, it has forged an exclusive supply agreement with Ikea, the affordably priced Swedish home furnishings chain.
Cooking In Ikea Kitchens
Since select products went into Ikea stores in the U.S. last year, Caesarstone has enjoyed a boost in sales if not gross margin.
But analysts say that sales generated at Ikea are worth the gross margin hit and in any event make up for it in scale benefits -- good operating margins from savings in selling and general administrative costs.
Selling to both luxury and mass-market buyers may seem like courting "brand conflict," says David Goldberg, building products analyst at UBS. But he says that it hasn't yet been a problem.
"Good acceptance" on both ends of the consumer spectrum is one of the big reasons Caesarstone is growing market share in the U.S., he says.
The U.S. is Caesarstone's fastest-growing and largest market. Third-quarter sales in the U.S. jumped 47.8% over the same time a year earlier to $50.5 million, accounting for 40.9% of total revenue.
Total revenue in the quarter grew 30.7% to $123.3 million. But gross margin fell to 43.7% from 44.5%, due partly to lower-margin fabrication and installation revenue from Ikea, as well as some foreign exchange headwinds and modest cost inflation.
Still, in its Q3 report released on November 5, earnings rose 62% to 76 cents per share, sending shares up nearly 5% to 59. They were last trading around 63, up from an IPO price of 11 in 2012.
Engineered quartz has been around for years, but only recently has it been gaining popularity in the U.S., Goldberg says.
Caesarstone is gearing up to meet the new demand. It's building its first manufacturing plant in the U.S., expected to open in Georgia in the second quarter. A second production line there is set to open in the fourth quarter.
The company's other five production lines are at two plants in Israel, including the firm's founding operation at the Kibbutz Sdot-Yam near the old city of Caesarea.
Founded in 1987, Caesarstone was an early pioneer in natural quartz surfaces.
Starting With Stone
It makes slabs from a mixture of ground quartz aggregates, pigments and polymers, and claims that the surfaces are hard, nonporous, scratch- and stain-resistant and durable. Those qualities make them "highly competitive" to granite, manufactured solid surfaces and laminate, the company says.
Caesarstone puts its share of the fragmented U.S. quartz countertop market at 16% -- and that was using the last available figures, from 2012.
Other quartz manufacturers include Minnesota-based Cambria and Spain's Cosentino, both family owned, as well as conglomerateDuPont ( DD ), which makes Zodiaq-branded quartz surfaces. Even laminate maker Wilsonart has rolled out a new quartz line.
New products are helping to lift Caesarstone's sales. They include natural-stone looking Supernatural and Calacatta Nuvo, the latest new-product launch.
After the U.S., Caesarstone's next largest market is Australia, where sales in Q3 jumped 36.3% to $30.8 million. Canada, Israel and Europe are the next biggest regions. Caesarstone sells its products in more than 50 countries.
European sales in Q3 grew only 3.2% year-over-year to $6.1 million.
In Israel, Caesarstone has nearly a 90% market share, so it shows slow growth in its home country. Revenue from Israel in Q3 grew only 2.6% to $11.2 million, thanks partly to a soft housing market.
The U.S. housing market is doing better. Housing starts in December clocked in at a seasonally adjusted annual rate of nearly 1.1 million, according to the Census Bureau. That was 5.3% higher than a year earlier but still below historical norms.
Housing Market Looks Key
Analysts see home starts rising to nearly 1.4 million this year. All of those new homes will need countertops.
And even more opportunity may present itself in older housing, Goldberg says. That's because the nation's existing housing stock -- some 110 million homes in total across the U.S. -- far outnumbers new-home starts.
Existing-home sales are seen rising 6.6% this year to 5.26 million, according to a forecast from the National Association of Realtors. Some of those buyers will likely want to renovate.
Repair and remodeling spending in the U.S. is expected to grow 3% to 6% this year, according to varied estimates.
"The countertop market generally is going to be much more driven by repair and remodeling than new-home starts," Goldberg said. "The question is, 'What will the adoption rate of quartz be in the U.S.?'"
After its strong Q3, Caesarstone raised its full year 2014 forecast to $445-$450 million in revenue from $435-$445 million previously. It upped adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) guidance to $115-$118 million from $112-$117 million.
The company is scheduled to report fourth-quarter and full-year 2014 results on Feb. 11 before the stock market open.
Analysts polled by Thomson Reuters expect Q4 earnings to come in up 20% year-over-year at 59 cents a share and up 28% for the full year of 2014. They see a 19% gain in 2015.
Caesarstone is part of IBD's Building-Construction Products industry group, which is ranked a strong 22 out of 197 groups tracked.
The company holds the highest possible IBD Composite Rating, 99, factoring in metrics such as earnings growth and stock price gains.
Other highly rated stocks in the group includeMohawk Industries ( MHK ),Masco ( MAS ),Headwaters ( HW ) andAcuity Brands (AYI).
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
