Agricultural stocks, like Deere & Company (NYSE:DE) and Caterpillar (NYSE:CAT), appear to be coping with the global economic slowdown by expanding into the emerging markets of Brazil, Russia, India and China. Valmont Industries (NYSE:VMI), who supply irrigation equipment to the global agricultural market, also are benefiting from an increasing demand for food worldwide. However, what makes it truly appealing is its revenue diversification beyond agriculture. Despite an excellent business model, its stock is down 5.5% in the past 52 weeks and as of Nov. 28, it was trading less than 10% from its 52-week low of $73. At these prices, you're getting a great business at a really fair price.
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Valmont's consolidated revenues were $1.9 billion for the thirty-nine weeks ended Sept. 24. The irrigation segment, which generates all the press, had revenues of $485.4 million in the first three quarters of the year, with an operating profit of $80.6 million. The company's biggest segment is its engineered infrastructure products, which manufacture cell towers and many other types of structures, with revenues in the first three quarters of 2011 of $579.6 million and operating profits of $30.9 million. Its most profitable is its coatings division, which provides hot tip galvanizing to protect steel from corrosion, with an operating margin of slightly less than 20%. None of its five segments generated less than $200 million in sales and $30 million in operating income during this period. You can't get much more diversified than that. (For related reading, see Understanding The Income Statement.)
If you look at the selected five-year financial data in its 2010 10-K; at first glance, you would probably come to the conclusion that both 2009 and 2010 were difficult years. In 2009, revenues declined by 6.3% to $1.79 billion, the first drop in six years. The big loser was its irrigation segment, which suffered from lower demand for its mechanized irrigation machines due to lower farm commodity prices and net farm income worldwide. Essentially, they were postponing capital investments. As a result, revenue and operating income declined 36% and 60% respectively.
Without the diversification mentioned above, the damage to its stock in 2010 could have been significant. Instead, its total return was 13.9%, slightly underperforming the S&P 500. The main reason for the increase, as far as I can tell, was because its utility support structures' segment had a banner year in 2009, delivering operating income of $164.8 million, a 124.2% increase over 2008. In fact, 2009 was its best year yet, in terms of profitability, both from a dollar and margin amount.
The bad year was 2010. While revenues increased by almost $200 million, both its gross and operating margins were lower and that seems to have affected its stock in 2011, down 12% year-to-date. However, I believe investors have gotten it wrong. Business has never been better and its trailing twelve-month return on invested capital after three quarters is 13.7% and back to traditional levels. Management expects earnings per share for all of 2011 to be at least $5.70, its second best performance next to 2009. Working backwards, I calculate its ROIC for 2011 will be 14.6% and more than acceptable.
Valmont Industries and Peers
Valmont Industries (NYSE:VMI)
Lindsay Corp. (NYSE:LNN)
Deere & Co. (NYSE:DE)
The Bottom Line
Valmont Industries should set a record in 2011, for both revenues and earnings, and yet, its enterprise value is just 6.9 times EBITDA and its price-to-sales is as low as it's been, in the last five years. Analysts estimate its 2012 earnings at $6.81 a share, which gives it a forward P/E of 11.3. The last couple of years has shown just how resilient its business model really is. This really is a stock to own in good times and bad. (For related reading, see How To Use The P/E Ratio And PEG To Tell A Stock's Future.)
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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.