What makes Valmont Industries an immediate buy!
rakesh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Valmont Industries (NYSE: VMI) has the pole position. Its founder, Robert Daugherty, helped develop the center pivot irrigation pipe that transformed farming. The company has four business units: engineered infrastructure products (EIP; metal poles and other structures for lighting, traffic, and wireless communications industries); irrigation (agricultural irrigation equipment sold under the Valley brand); utilities support structures (steel and concrete poles and other structures used by utilities); and coatings (galvanizing, anodizing, and powder coating).
Customers and end-users of Valmont's products include state and federal governments, contractors, utility and telecommunication companies, manufacturers of commercial lighting fixtures, large farms as well as the general manufacturing sector. Roughly 45% of total sales last year were either achieved in markets or produced by manufacturing plants outside of North America. The company has diversified geographically to over 100 countries.
For the quarter, the company’s net sales were around $815 million compared to $752 million for the same period in 2011. Operating income was $111.74 million compared to $77.35 million for the same period in 2011. The increase in operating income was due to an improving mix of orders and the positive impact of volume and SG&A leverage. The company reported $2.43 earnings per share outperforming the general consensus of $2.24, while declining from the prior-year quarter’s earnings of $4.33 per share. Profit slid roughly 44% year over year to $65 million in the reported quarter. The prior-year quarter's results included a favorable one-time tax benefit of $2.49 per share and $0.01 per share of other items. Excluding this, earnings for the year-ago period were $1.83 per share. For full-year 2012, earnings came in at $8.75 per share again outstripping the general consensus of $8.56.
Looking ahead to fiscal 2013, Valmont forecasts high teens earnings growth and low teens revenue growth. Analysts expect the company to earn $9.56 per share for the year on revenue of $3.25 billion.
Valmont's valuation seems to be in the middle of the road with a 17.58 PE, while peers in steel pipe and tubing like MRC Global (NYSE: MRC) and Tenaris SA (NYSE: TS) trade at 24 and 14 times earnings, respectively.
Tenaris is a $24 billion company that engages in the manufacture and sale of steel pipe products. It has expected EPS growth for the next 5 years of 17.67%. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, notable return on equity, expanding profit margin and good cash flow from operations. The company has a satisfactory net profit margin of 16%-17% and low long-term debt along with decent growth prospects at the bottom line.
MRC sells industrial goods such as pipes, valves and fitting to the energy industry. The bullish trend in energy is a huge tailwind for the company, as a growing global population continues to drive demand. Looking forward to the full year 2013 analysts expect the company to earn $2.49 per share on revenue of $6.14 billion.
Strategic expansion through acquisitions
Valmont, In Jan 2013, acquired certain assets of Ontario, Canada-based Pure Metal Galvanizing. Pure Metal, which has annual sales of roughly CAD$34 million ($34.4 million), is a market leader in custom hot dip galvanizing in Canada. It operates five kettles out of three locations in Ontario. The purchase of the Canadian galvanizing operations reinforces Valmont’s global galvanizing business. The acquisition will surely add to its bottom line in 2013.
It also acquired Australia-based Locker Group Holdings Ltd for an undisclosed price. The market leader in Australia and Asia, Locker Group has annual sales of nearly $80 million and possesses five manufacturing locations across the region. Valmont anticipates the buyout be to slightly accretive to its 2013 earnings after considering the transaction costs.
The company recently announced the sale of Bilston Investments Proprietary Limited, a South African holding company acquired as part of the Delta acquisition. All the outstanding shares of Bilston were sold to three South African purchasers for a total purchase price of $30 million. Bilston served as a South African holding company for Delta and held 49% of the outstanding shares of Manganese Metal Company, a non-consolidated subsidiary. Bilston contributed $5.1 million after tax to Valmont in 2012. The Company does not expect the profit or loss on the sale to be material, although certain deferred tax benefits approximating $3 million associated with the sale are expected to be recognized in 2013.
Growth Opportunity in the coming year
June 2012 now ranks sixth in terms of “Peak % Area in Drought” since 1895 (according to the National Climatic Data Center). Because of this drought, the Department of Agriculture has lowered its expectations for corn production by 12%. Soybean production is headed in the same direction unless there is a drastic change in the weather patterns that have been taking their toll as of late. The end of July through the beginning of August is typically the most vital time in the life-cycle of soybean plants. So farmers are now looking for irrigation systems to gain out of the high commodity prices along with reducing the impact of crop loss. This has led to a huge demand for mechanized irrigation systems in the near-term, and all this will surely boost sales and profitability for the company thus making it an attractive entry point for the investors in this stock.
The Coatings segment is benefiting from moderating zinc prices and declining energy costs. The company is also poised to see incremental opportunity in the utility market. The global transmission and distribution markets are seen as major long-term growth opportunities. The company is actively pursuing capacity expansion through new constructions and extension of existing facilities to meet the increasing demand from utility customers in North America.
The company looks like potentially promising investment, as the sustainable factor in demand is the continued population growth. I believe that longer term growth trends for Irrigation remain compelling and so a Buy rating on the stock is apt.
rakesh786 has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!