Kibbutz to Kardashian Turns Caesarstone, Maker of Kitchen Countertops, Into World Beater

Kibbutz to Kardashian Turns Caesarstone Into World Beater

The kibbutz that controls Caesarstone Sdot Yam Ltd. (CSTE), the maker of Kim Kardashian’s quartz kitchen countertops, is taking advantage of a 34 percent surge in profit since selling shares in New York last year to build a factory in the U.S. and start paying residents’ salaries.

Instead of the socialist ideals of its founders, the northern Israeli community has joined kibbutzim courting investors and listing on stock exchanges in Tel Aviv, London and New York (ISRA25BN). The farm collectives central to establishing the state in 1948 now make everything from drip irrigation systems to home furnishings for reality TV stars, contributing about 7 percent of industrial output in an economy growing faster than the average of advanced economies since 2003.

Caesarstone rose 44 percent in 2012, the second-best return among foreign initial public offerings in the U.S. after Guangzhou, China-based Vipshop Holdings Ltd. (VIPS) It’s up 83 percent this year and was named the exclusive provider of non-laminate countertops for the U.S. unit of Ikea Group. The combination of the 1980s financial crisis that bankrupted hundreds of kibbutzim and the country’s move to an export-led economy forced collectives to embrace free market strategies, said Gal Maharshak, the head of the non-profit organization desk at Excellence Nessuah Asset Management in Ramat Gan.Failed Model

“The socialist model failed and is not realistic anymore in modern times,” Maharshak said in an April 30 phone interview. “In today’s renewed model, members want to meet with the money and it’s in their interest to sell out and bring in private investors.”

Besides expanding into multinational manufacturing by building a new plant in the southeast U.S., the kibbutz is adopting other features of capitalism. Sdot Yam, founded in 1936 as a fishing village, owns 51 percent of Caesarstone and plans to start paying salaries based on position and seniority.

The company’s success depends on quartz gaining wider appeal in the U.S. Granite is used in 27 percent of the world’s countertops, almost four times as much as quartz, the second-hardest mineral after diamond, according to the company.

Quartz Benefits

Quartz is cheaper to own and less prone to stains and cracks than granite, Chief Executive Officer Yosef Shiran said in a phone interview April 19 from New Orleans, where he was attending a kitchen and bath trade show.

“Today, eight out of 10 customers in Israel use Caesarstone and you can hardly find granite or laminate,” Shiran said. “What we need to do is convince and educate them of the special characteristics and benefits,” he said of U.S. consumers.

Revenue increased 13.5 percent to $76.4 million in the first quarter from a year earlier, driven by sales in the U.S. and Canada, the company said May 8. Earnings rose to $10.5 million from $4.8 million.

Caesarstone’s surge this year beat the 20 percent rally in the SPDR Standard & Poor’s exchange-traded fund of homebuilder stocks. The Bloomberg Israel-US Equity Index of the biggest Israeli companies traded in the U.S. is up 7.1 percent in 2013, in part fueled by the company’s advance.

While Stifel Nicolaus & Co.’s John Baugh has rated Caesarstone’s stock a buy for the past year, prospects that the U.S. factory won’t open until 2015 may be a concern for some investors.

Mideast Instability

“Their assets are currently all based in Israel and that’s an unstable part of the world in some people’s eyes,” Baugh, a consumer company analyst in Baltimore, said by phone May 15. “If you got a correction in all homebuilding stocks I think that’s probably the biggest risk to the stock, not the business.”

The advance prompted Tene Investment Funds Ltd. to sell its 23.1 percent stake in April, realizing a gain of more than 5 times its original $39 million investment, according to Ariel Halperin, a senior managing partner. Tene, which manages $205 million in private investments with a focus on kibbutz companies, pushed the company to sell more of its products abroad.

Caesarstone, which started trading on the Nasdaq stock market in March 2012, had the second-best debut of any foreign company in the U.S. last year. The company sold 6.66 million shares at $11 each underwritten by JPMorgan Chase & Co. (JPM), Baird Capital Partners, Barclays Capital Inc. (BARC), Credit Suisse Group AG (CSGN) and Stifel Nicolaus. Since then the stock has more than doubled to $29.20, giving it a market valuation of $1.01 billion.

Kim’s Countertop

With countertops in Kardashian’s Beverly Hills, California home, and in Daniel Libeskind’s Dancing Towers building in Singapore, Caesarstone has potential for growth, according to Steven Schoenfeld, founder of Bluestar Global Investors LLC, a research company focused on Israel and the Middle East.

“We are still bullish on Caesarstone as Tene’s exit is not expected to trigger a sudden shift in management strategy,” he said by phone from New York on May 8.

Like many of the collective enterprises that pre-date Israel’s founding, Sdot Yam accumulated too much debt during the early 1980s, when hyperinflation hit and sent consumer prices up by a record 486 percent in 1984. Since then the ideal of community equality that included group houses for children, shared meals and communal cars has gradually been transformed.

Technion Help

Sdot Yam turned to quartz after its factory making terrazzo tiles foundered. The collective came up with the idea of binding quartz into countertops using a chemical formula developed with the help of engineers at the Technion Israel Institute of Technology in Haifa.

The natural quartz used by Caesarstone is mainly mined in Turkey and then shipped to Israel, Deputy Chief Executive Officer Giora Wegman, a member of a Kibbutz Sdot Yam founding family, said in a phone interview May 6 from the company’s offices.

“About 10 years ago, the kibbutz decided to separate the company from the community to make sure it’s run like any other company with a board, audit committee and external directors,” Shiran said. Today, about 8 percent of the company’s 900 employees are from Sdot Yam, he said.

Kibbutz Evolution

Most kibbutzim no longer operate on a collective basis. About 16 of the 230 kibbutz companies are traded on the Tel Aviv Stock Exchange and other public exchanges in London and the U.S., according to the Kibbutz Industries Association Ltd. About 98 of them have some outside investment. Sales almost doubled to 34.5 billion shekels ($9.3 billion) last year from 19 billion shekels in 2000 and about 60 percent were exports, according to data from the association.

The nation’s economy will expand 3.8 percent this year, aided by first-time natural gas production that will add 1 percentage point, according to the Bank of Israel. Gross domestic product grew 3.2 percent last year and 4.6 percent in 2011. GDP will rise 3.9 percent next year, according to the median of 14 analysts’ estimates compiled by Bloomberg.

Israeli GDP advanced an average 4.35 percent since 2003, outpacing the 1.56 percent for 35 industrialized nations, according to International Monetary Fund data.

Plasson Industries Ltd. (PLSN), a maker of plastic pipe systems exported to 80 countries, went public on the Tel-Aviv Stock Exchange in 1997. The market capitalization of the Maagan Michael-based company has jumped to 1.21 billion shekels from as low as 274 million shekels in 2008. The shares, which rose 19 percent this year, reached a four-year high on March 12. The shares gained for a fourth day, adding 0.2 percent to 127.1 shekels at 10:51 a.m. in Tel Aviv.

Drip, Drip

Netafim Irrigation Inc., based in Kibbutz Hatzerim in the Negev desert, started in 1965 when members teamed up with an engineer who discovered that a slow and balanced supply of water improved plant growth. The privately-owned company transformed itself into a global seller of smart drip and micro-irrigation products.

Permira Advisers LLP, a European private-equity company, bought a 61 percent stake in 2011, in a transaction valued at 800 million euros ($1.3 billion). As kibbutz companies improve finances, investment funds that threw them a lifeline during crises are cashing out.

“Kibbutz-based companies have become smarter and more cautious about the conflict of interest between their long-term needs and the exit strategies of private investors or funds,” Udi Orenstein, the head of the Tel Aviv-based Kibbutz Industries Association, said by phone May 8. “Today the kibbutz industry is in a much better situation economically.”

To contact the reporters on this story: Sharon Wrobel in Tel Aviv at swrobel4@bloomberg.net; Leslie Picker in New York at lpicker2@bloomberg.net