Valmont Industries' (NYSE:VMI) first quarter was very strong. It expects more of the same in the second quarter and quite possibly the remainder of the year. Its stock on the other hand has lost 10% of its value in the past month alone. Currently taking a breather, I'll look at why now is a good time to consider buying its stock.
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A Decade of Success
Valmont can best be described as a business extremely familiar at developing steel and aluminum infrastructure products. Whether we're talking telephone poles, transmission towers or center pivot irrigation systems, this is a company that keeps America moving. As the U.S. has grown over the past decade, so too has Valmont, whether it be its profits or its stock price. Since 2002, its operating profit increased 18.5% on an annualized basis while its stock gained an average of 22.7% per annum. Meanwhile, the S&P 500 saw EPS increase 9.2% annually over the past decade while the SPDR S&P 500 (NYSE:SPY) increased by 7% annually. Given Valmont's profits grew at twice the pace of the S&P 500, it's not unreasonable for its stock to have grown by 420 basis points faster than earnings. As the first quarter demonstrates; this is a company that knows how to grow profitably.
Valmont's operating profit in the first quarter was $118.2 million on $819.6 in revenue. Its operating margin of 14.4% is the highest in the last decade. Three out of four segments increased operating margins year-over-year with coatings, its smallest segment, being the exception. Its other small segment--engineered infrastructure products--actually increased operating profits in Q1 by 58.7%, greater than both its utility support structures and irrigation segments. Valmont expects better performance from its coatings and engineered infrastructure products for the remainder of the year, which will help produce record margins in fiscal 2013.
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Interestingly, neither Valmont or Lindsay Corp. (NYSE:LNN), its biggest competitor in the irrigation space, lists the other as a peer in their respective proxy reports. However, there's no doubt they're competitors. As a pure play irrigation play (it does have some other infrastructure revenue but less than 10% of overall), its irrigation revenues through the end of August 2012 were $475.3 million with an operating profit of $80.3 million. Valmont's irrigation revenues in fiscal 2012 (December year end) were $750.6 million with an operating profit of $143.6 million. Valmont's operating margin of 19.1% was 220 basis points higher than Lindsay's. If Valmont was also a pure-play irrigation company I'm quite sure its enterprise value would be more than 8 times EBITDA.
In terms of stock performance, Valmont has outperformed Lindsay in seven of the last 10 years. In 2013, Valmont's up 6.1% year-to-date through April 22 compared to a decline of 6.6% for Lindsay. David Rose of Wedbush Securities upgraded it from "Neutral" to "Outperform" April 22 with a price target of $170. Rose said this about Valmont: "Given the recent pullback in share price and our comfort with the long-term outlook, we believe investors have another opportunity to purchase shares at a reasonable price." In the metal fabrication industry, its two closest competitors in terms of market cap are Allegheny Technologies (NYSE:ATI) and Reliance Steel & Aluminum (NYSE:RS). Their enterprise values are 8.1 and 7.6 times EBITDA respectively. Neither has Valmont's margins yet it trades for the same multiple. When you consider Valmont's diversification--it's just nuts.
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Successful investors buy great companies at fair prices. Over the last decade Valmont's stock has experienced just one year with a negative return. That was 2008. Even then, it was able to outperform both the S&P 500 and its metal fabrication peer group. With a beta of 1.11 it's only marginally more volatile than the market as a whole.
Seventeen months ago I wrote that Valmont Industries is a stock to own in good times and bad. Since then its stock has gained 82.1% compared to 34.4% for the SPY. The funny thing is Valmont today is an even stronger company than it was in November 2011. As the Wedbush analyst said earlier--investors have a chance to purchase its shares at a reasonable price. Opportunity knocks. Don't miss it!
At the time of writing, Will Ashworth did not own any shares in any company mentioned in this article.