Some Sign of Green Shoots

Water irrigation company Lindsay Corporation (NYSE: LNN) reported earnings for its fiscal third quarter (ended May 31) yesterday. Net earnings for the quarter were $11 million, or $1.02 per share, a 14 percent year-over-year improvement. Irrigation revenues in both the U.S. and international markets modestly improved, while revenues from the smaller infrastructure segment were substantially higher than the same quarter a year ago.

U.S. revenues grew 2 percent due to both higher average selling price and higher volume in irrigation equipment, partially offset by lower revenue in irrigation components (pumps, filtrations, etc.). The third-quarter slight rebound is an encouraging sign after a tough first two 2017 fiscal quarters and a difficult patch overall in the U.S. due to unusually favorable weather for agriculture. This increased crop yield and pushed down prices, which in turn caused farmers to delay investment in equipment. The decent third-quarter figures suggest that at least there’s some stabilization in the market.

Overseas, Brazil continues to be a bright spot, helped by the Brazilian government’s decision to lower the interest rate and increase the funding available through a financing program for irrigation equipment. Revenue for the overall international irrigation segment grew 2 percent.

Once again, the infrastructure segment was the standout. Third-quarter revenues totaled $31.5 million, a 31 percent increase compared to a year ago. Continued solid demand for the Road Zipper system and growing sales of road safety products in international markets drove the strong quarter. Operating margins for the segment in the quarter improved significantly to 25.5 percent from 19.4 percent. The FAST Act, passed in 2015, authorizes up to $305 billion to fund surface transportation infrastructure planning and investment through 2020, and help to drive spending in this area.

Cash and cash equivalents was $113.2 million and total backlog was $70.1 million at the end of May, both improvements compared to a year ago and the company continues to have no debt. Encouragingly, the backlog increase came from the irrigation segment, particularly from international markets—mostly developing countries where Lindsay sees increased agricultural project startup activity. Keep in mind that Lindsay’s backlog tends to be relatively short term, usually within a six-month time frame.

Despite three consecutive years of declining revenue and earnings per share, Lindsay has stayed profitable and managed to incrementally improve its profit margins. It’s a very well-run company that’s managed to stay afloat during a long difficult patch in the agricultural market. It’s impossible to predict when irrigation demand may pick up significantly in earnest because it’s literally a matter of predicting weather trends. And the agriculture-friendly weather patterns have lasted longer than we expected.

However, we do know that the fundamental demand outlook in developing markets is good (although these markets come with lower margins and certain geopolitical risks associated with these countries) and the domestic U.S. market is showing indications of stabilization. Its infrastructure segment has consistently offset the declines in the company’s main irrigation segment and the outlook likewise is strong.

It speaks volumes to the quality of the company that despite earnings per share less than half of what where it was during the fiscal-2013 peak, the share price still trades near its 2013 peak. Of course, this means the valuation is a little dear; shares currently trade at about 31-times projected forward 12-month earnings. This means that the market has already priced in expectations for a good amount of recovery. We rate LNN a “hold” now and recommend buying on price dips.

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