If only investing were as easy as saying "crop prices are strong, so buy stocks like Potash (NYSE:POT), Deere (NYSE:DE) and Lindsay (NYSE:LNN)." Although global crop prices were indeed strong in 2011, they were actually fairly weak in the latter half of the year and quite a few ag-related stocks have been weak as well. Making matters worse, Lindsay's irrigation business is almost as volatile as the commodities themselves, making this a consummate feast-or-famine type of equity.
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A Good Start to the Year
Lindsay doesn't often do as expected; surprises good and bad are more the norm. In this quarter, it was a good surprise - revenue rose 34% and easily topped the high end of the analyst guesses. Growth was driven by the irrigation business where revenue climbed 68% on fairly equal growth in domestic and international sales. The almost equally volatile infrastructure business saw revenue drop 37%, due in large part to shortfalls in the Quickchange Moveable Barrier (QMB) business.
Lindsay did all right on profits as well. Gross margin slipped almost two points from last year - not a great surprise with the lower QMB contribution, and given that steel is a significant input and companies like Nucor (NYSE:NUE) and Steel Dynamics (Nasdaq:STLD) have been pushing on prices. Although reported operating income fell more than 20%, adjusted earnings were better, the difference being accrued expenses for environmental remediation liabilities. Though excluding all of this is arguably inaccurate and misleading, the fact remains that the underlying profitability of the business is in good shape. (For related reading, see Understanding The Income Statement.)
Who Really Knows the Outlook?
Unfortunately, one solid quarter from Lindsay just doesn't mean all that much. Likewise, the company's steady sequential improvement in backlog (but equally solid year-on-year decline) is little help. Farm income today is pretty solid relative to historic levels, but farmers are dealing with tougher credit conditions, more expensive seeds from the likes of DuPont (NYSE:DD), more expensive fertilizer, more expensive equipment and considerably more expensive land (a big issue for those who rent or lease).
For now, conditions are looking okay in the United States, solid in Latin America, but more uncertain in Europe. If corn, wheat or soybean prices weaken much more, it may be harder for Lindsay to deliver a good year. It is absolutely true that the long-term need for equipment and more efficient water use is there, but business for Lindsay and larger rival Valmont (NYSE:VMI) is influenced by current crop conditions to a degree that might surprise many investors.
Not helping matters is the outlook for infrastructure. Lindsay derives some fairly high-margin business from products tied to road work. Although it seems like there are cones and portable barriers up in every city, actual "shovel-ready" project spending is not so strong right now.
The Bottom Line
As far as volatile ag-sensitive equity plays go, Lindsay is just as good as any. While some investors may look at names like Flowserve (NYSE:FLS) or Franklin Electric (Nasdaq:FELE) as ancillary plays, the reality is that there just isn't enough ag exposure there to really matter. For better or worse, playing ag means playing volatile names like Deere, Potash and Lindsay.
Assuming that the nature of Lindsay's cycles doesn't change all that much, the stock is slightly undervalued here. Again, though, valuation on such on a cyclical and momentum-driven story is almost moot. Investors who think ag stocks can rebound in 2012 should own Lindsay; those who don't, shouldn't. (For related reading, see Guard Your Portfolio With Defensive Stocks.)
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At the time of writing, Stephen Simpson did not own shares in any of the companies mentioned in this article.