Drought Benefits Two Irrigation Companies

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Drought is a major concern in the Midwest, but the natural disaster is actually your friend if you own irrigation equipment makers.

Farmland is still thirsting for more moisture, despite winter snowstorms in the Great Plains states. The most severe drought conditions are in South Dakota, Nebraska, Kansas, Oklahoma and Texas, according to the U.S. Drought Monitor at the University of Nebraska-Lincoln.

Sales for mechanized irrigation equipment were strong in 2012 for Lindsay Corporation (NYSE: LNN) and Valmont Industries (NYSE: VMI), both based in Omaha, Neb. I expect sales in 2013 to grow even more. Farmers are flush with cash from strong income in recent years. They have been buying land and upgrading equipment for their operations.

U.S. Farm Income in 2012 was the second highest on record at $114 billion, down only 3.3% from the record set in 2011, according to a Congressional Research Service’s Dec. 10, 2012, report.

Both Lindsay and Valmont are diversified manufacturing companies, but Lindsay derives most of its income from irrigation equipment sales.

Demand for irrigation equipment is growing as evidenced by Lindsay’s $85.1 million backlog of unshipped orders on Nov. 30, 2012, compared with $52.8 million a year earlier. Valmont ended 2012 with record backlogs in its irrigation business, too.

Lindsay’s revenue climbed 24% to $147.4 million from $119.2 million, boosted by higher irrigation equipment sales during fiscal first quarter ended Nov. 30. Lindsay earned $14.7 million, or $1.15 per share, up from earnings of $2.9 million, or 23 cents per share, in the prior-year period.

Total irrigation equipment revenues increased 33% to $134.2 million. About 91% of Lindsay’s revenues came from irrigation sales in fiscal first quarter. 

Rick Parod, Lindsay president and chief executive officer, said, “Irrigation order volumes remained extremely robust throughout the first quarter as drought conditions combined with positive farmer sentiment, farm incomes and commodity prices continued into fiscal 2013. Infrastructure sales were disappointing, although we remain optimistic that we will see improving trends over the course of the year.”

Lindsay had $152.17 million in cash and only $3.26 million in debt on Nov. 30. This company pays a tiny dividend, yielding 0.5%, but probably should keep the money and re-invest in its business.

Valmont’s irrigation equipment sales rose 13% in the fourth quarter to $203.4 million. Irrigation equipment sales represented 24% of total sales in the fourth quarter. Valmont said irrigation equipment sales gains in North America more than offset a decline in international sales. While sales increased in most regions, total international sales declined due to a reduction in project business in North Africa, Valmont said.

Valmont’s other businesses include Utility Support Structures Segment, which was 30% of fourth quarter sales; Engineered Infrastructure Products Segment including lighting and traffic safety products, was 27% of fourth quarter sales; Coatings Segment was 10% of fourth quarter sales.

Valmont had $414.13 million in cash and $486.19 million in debt at year-end. Its dividend yield is 0.60%.

"The main drivers of record fourth quarter operating results were the substantial sales increases in the Utility Support Structures and Irrigation Segments," said Mogens C. Bay, Valmont's Chairman and Chief Executive Officer.

There is risk. If the weather changes and the Great Plains states see above-average rainfall over the next several years, sales may drop off for irrigation equipment. I suspect some farmers will buy the irrigation equipment anyway as a hedge against any future drought year.  Another big concern is depletion of groundwater sources.

Both Lindsay and Valmont are well positioned to take advantage of the drought. I expect record sales of irrigation equipment in 2013.


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