Lindsay Corporation: Get Long or Get Out While You Still Can?
You have probably never heard of the Lindsay Corporation (NYSE:LNN), but it is an extremely profitable company that Wall Street has loved for ages. Right now, the stock is pulling back after a rough quarter and political instability in jurisdictions where it operates certain contracts. It may be an opportunity to get into (or out of) the stock. I will elaborate in a moment, but since many may be wondering, the company designs, manufactures, and sells irrigation systems that are primarily used in the agricultural industry to increase or stabilize crop production while conserving water, energy, and labor in the United States and internationally. It also manufactures and markets various infrastructure products.
The company’s irrigation segment manufactures and markets center pivot, lateral move, and hose reel irrigation systems, irrigation controls, chemical injection systems, and remote monitoring and control systems. This segment also provides hose reel travelers and solid set sprinklers, markets pivot monitoring and control systems and offers separators and filtration solutions for groundwater, agriculture, industrial, and heat transfer markets. Its infrastructure segment offers ‘Quickchange Moveable Barrier’ systems that help in highway reconstruction, paving and resurfacing, road widening, median and shoulder construction, and tunnel and bridge repairing; and redirective and non-redirective crash cushions, which are used to enhance highway safety at locations, such as toll booths, freeway off-ramps, medians and roadside barrier ends, bridge supports, utility poles, and other fixed roadway hazards. This segment also provides specialty barrier products that offer portability and flexibility in setting up and modifying barriers in work areas, and provide quick opening, high containment gates for use in median or roadside barriers.
In addition, it offers diameter steel tubing, railroad signals, and structures; and outsourced manufacturing and production services for other companies. The company serves departments of transportation, municipal transportation road agencies, roadway contractors, subcontractors, distributors, and dealers worldwide. The stock is now flat year-to-date, trading at $83.60 after reporting disappointing earnings that missed on the top and bottom lines, while revealing trouble with a contract in Iraq. Should you seize this opportunity to get long, or get out while you can?
There is no way to sugar coat it — the quarter was bad. Lindsay’s third-quarter fiscal 2014 revenues were $169.9 million, versus $219.5 million of revenues in the same prior-year period. Net earnings were $16.5 million or $1.28 per diluted share compared with $26.1 million or $2.01 per diluted share in the prior year. That is incredible year-over-year decline. Total irrigation equipment revenues decreased 26 percent to $149.0 million from $200.9 million in the prior fiscal year’s third-quarter primarily due to lower crop prices. U.S. irrigation revenues of $88.1 million declined 26 percent while international irrigation revenues of $60.9 million decreased 26 percent. Infrastructure revenues were a bright spot for the company. The infrastructure sales increased 13 percent to $20.9 million with increases in road safety, rail and its‘Road Zipper’ product lines.
So the headline numbers were indeed awful. What about some of the other metrics we should be aware of? Well, gross margin was 28.4 percent of sales compared to 28.7 percent of sales in the prior year’s third-quarter, another decline. Gross margin in irrigation declined by less than one percentage point primarily due to fixed cost deleverage on lower sales. Infrastructure gross margins were another bright spot as they improved by approximately three percentage points due to sales mix and leverage on higher sales.
Operating expenses were essentially flat year-over-year. They were $23.0 million compared to $23.5 million in the same prior year period. Operating margins dipped as well, and they were 14.8 percent in the quarter, versus 18.0 percent in the prior-year period. The company still has a good balance sheet. Its cash and cash equivalents of $182.1 million were $11.8 million higher compared to the end of the third-quarter in the prior fiscal year, while debt decreased $1.1 million. During the quarter the company also repurchased 129,104 shares for $11.2 million.
So there is no doubt that the company struggled. But I think the stock is a sell at this point and not an opportunity. While the business fluctuates seasonally and weather and crop prices impact the company, we also learned that the June 2014 escalation of political instability has made it more difficult to complete the company’s contract in Iraq. This is a major red flag for shareholders. The company has a total exposure of $4.4 million on this contract, including $2.5 million of accounts receivable, which is not currently due, and a $1.9 million performance bond securing completion of the contract. The company has not provided a reserve for these amounts, but will continue to assess the situation as developments in the country evolve. Further installation of equipment in Iraq has been put on hold as a result of the escalation of hostilities in the region and is a truly negative impact to the company. Rick Parod, president and chief executive officer, stated:
Lower commodity prices led to decreases in irrigation sales throughout North America during the primary selling season. Spring storms have created additional demand for replacement units, which increased our U.S. irrigation backlog at the end of the quarter. However, overall favorable growing conditions in North America continue to restrain crop prices. The lower crop prices, along with the reduction in the Sec. 179 tax benefits, create a headwind for irrigation equipment demand as compared to the previous year. Coupled with the addition of the conflicts in Ukraine and the Middle East, we have seen some slowing in international projects, as well. We have achieved a significant change in our Infrastructure segment.
Revenues have grown 26 percent year-to-date and the business is profitable. We continue to see opportunities for growth in global applications of our technologies and in expansion of our global market share. A multi-year highway bill with similar or improved funding levels would likely benefit the segment even further. Drivers for the company’s markets of population growth, expanded food production and efficient water use, and infrastructure expansion support our expectation for long-term growth. We anticipate a continuation of lower agricultural equipment demand in the near term, and have implemented appropriate expense controls. However, we will continue investment in critical growth initiatives and the execution of our capital allocation plan announced in early January 2014.
All things considered, we have a company that has had a good run up in the last few years. It has just missed on the top and bottom line. Revenues and earnings declined substantially year-over-year. While the company ‘expects’ long-term growth, there is no guarantee. This quarter was poor. The political instability in Iraq and the jeopardizing of the contract there is a red flag. Right now, despite its past success, I think you should get out while you can. Take profits. If the company gets back on track, we can reassess getting back into the name. I rate the company a sell and assign a fair value price target of $72.
Disclosure: Christopher F. Davis hold no position in Lindsay Corporationand has no plans toinitiate a position in the next 72 hours. He has asell rating on the stock and a $72 price target.