On Monday Lindsay Campbell did a piece about her namesake company, Lindsay Corp. (NYSE:LNN) and its success in the farm equipment industry. For the most part the video blog was complimentary. In a subsequent video, Brian Shannon did technical analysis on the stock and surmised that it was a low risk buy at this time but also low reward and that he would pass on it. The question becomes a pass to what.
In the blog entry, Wallstrip refers to Lindsay Corp. as a cyclical whose cycle is about to end. That can’t be good news for those who’ve just bought the stock. What other companies can I invest in that play in the same industry but are less likely to experience slow growth in the coming months and years? Two that immediately come to mind are Valmont Industries (NYSE:VMI) and Kubota Corp. (NYSE:KUB).
Who is Valmont Industries and what’s to like about them?
The Nebraska-based company got its start after World War 2 building farm elevators for local landowners. In the early 1950s in order to survive a recession in the agriculture industry, the company obtained the right to use the patented centre pivot, a devise that provides overhead irrigation to farm fields in times of drought. Lindsay Corp. has a similar product and is a direct competitor of the company. I don’t pretend to be an agricultural expert so I have no opinion about whose irrigation system works better, just that both work effectively.
Valmont, however, is a company with more than just irrigation products. In fact, this part of the business contributed 31 percent of total sales in 2006. Other segments include Engineered Support Structures (telephone poles, traffic lights, etc.), Utility Support Structures (transmission towers and other electric utility products), Coatings (materials to protect against steel and aluminum corrosion), and Tubing (the materials for such structures as the irrigation systems).
Every segment grew their sales in 2006 helping to achieve a 16 percent increase to $1.28 billion with an operating profit of $110 million, up 32 percent from the previous year. The company, in it’s 4th quarter press release, highlighted two specific areas of improvement compared to 2005: the first, operating income, improved from 7.5 percent of sales to 8.6 and return on invested capital went from single digits, 7.7 percent, to 11.1. These are both excellent indicators of a business doing well and its best days are still to come.
Financially, Valmont is better off today than it’s been in some time. Corporate debt levels are at historical lows, and return on assets at historical highs. Margins are higher with room to grow even more so. Most importantly, on a valuation basis, Valmont is a better buy today than Lindsay Corp. Whether you compare price to sales, peg ratio, enterprise value to sales, forward price to earnings, return on assets, and most other numbers, the choice is clear.
While you can’t confuse Valmont for a growth stock, it does have enough in the tank to continue irrigating sales and earnings for the foreseeable future; and that’s all an investor really wants.
How about Kubota: what’s their story and why should I care?
Kubota is a Japanese industrial company with business operations around the world, including an American tractor business. Although its history in Japan dates back to 1890, it didn’t appear in North America until 1969 when they introduced the 21 horsepower L200 tractor. They been selling lots here ever since.
Agricultural machinery, which includes a small construction division, is the largest operating unit in the company. For the 9-month period ended December 31, 2006, it produced 70 percent of total revenue and 84 percent of operating income. It’s clearly the profit driver of the business and the United States and other countries outside Japan are leading the charge. Japanese sales represent only 35 percent of the total with 65 percent coming from the U.S. and elsewhere. Clearly, Kubota understands globalization.
The question I have: what can one expect in terms of sales growth from the tractor market in the next 12 to 24 months? I’m not really certain. However, an article appeared in Forbes in March that gives me cautious optimism that business on this side of the Pacific will continue to do well setting the table for a nice run-up in the price of the stock. In the most recent financial report, overseas farm equipment sales grew 20 percent while the domestic Japanese market shrank slightly. Can the company pull off the same growth going forward? That’s the million-dollar question.
I say yes and need only point to Caterpillar (NYSE:CAT) for inspiration. They’re projecting 2007 overall sales growth of up to 5 percent. Kubota can likely double that number if they make a little hay.