4 Takeaway’s From Lindsay’s Last Earnings Call
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On Jan. 8, 2013, irrigation and road infrastructure manufacturer, Lindsay (NYSE: LNN) reported (sign-in required) outstanding first quarter fiscal year 2013 numbers. Revenue increased 24% and the gross margin expanded to 29% from 25%. Lindsay returned shareholders 5% since the earnings announcement (chart below). Net earnings increased a whopping 407%. Lindsay’s success is owed to some of the same catalysts permeating the entire agricultural industry: an expanding world population, expanding emerging economies and increasing environmental awareness tempered by short term concerns as indicated in the four takeaways outlined here.
1. Robust domestic demand – Lindsay’s irrigation equipment sales grew 33% buoyed by a 59% increase in domestic sales. First, the drought in the U.S. drove crop prices higher leading to a domestic boon in agriculture. According to Lindsay’s earnings call transcript, net income from U. S. Farms came in second to the all-time record high. Secondly, longer lead times seemed to spur some panic buying among farmers for fear of supply shortages during the peak of the season. Third, a fairly strong replacement cycle contributed in a small part to the growth.
The same drought driven crop commodity boom also drove commodity prices for fertilizer companies. Domestic potash producer, Intrepid Potash (NYSE: IPI) increased its revenue and cash flow 14% and 2%, respectively. Global fertilizer producer Mosaic (NYSE: MOS) saw its North American potash sales increase 41%. Of course, the commodity boom fueling these results may not last, bringing down the prospects of Lindsay, Intrepid Potash, and Mosaic altogether at least in the short run.
2. Slumping infrastructure segment - Lindsay’s road infrastructure segment languished in the most recent quarter with revenue declining 29%. Some bright spots include the passage of a highway bill through 2014 and a pending Golden Gate Bridge project. The infrastructure segment represents 9% of total revenue so it’s hardly Lindsay’s bread and butter.
3. Excellent balance sheet – In the most recent quarter Lindsay’s free cash flow grew an impressive 215% versus the same quarter last year. Its $152 million in cash represents 47% of stockholder’s equity. It possesses no long term debt and its total debt to equity ratio stands at a low 36%, well below my personal threshold of 85%.
According to Lindsay’s CEO Richard Parod, possible uses of the cash range from acquisitions to special dividends.
4. Fuzzy short term outlook – While the long term outlook remains bright, the short term outlook remains a little fuzzy. As noted above, drought conditions creating high crop prices and the need for irrigation systems may dissipate. In addition, fear of irrigation system supply shortages in the peak of the planting season could lead to a “demand pull forward” causing a sharper than usual decline in the demand curve later in the year. The political volatility in Washington leaves a big question mark on Lindsay’s short term prospects in its infrastructure segment.
To sum up, robust domestic demand contributed to Lindsay’s excellent numbers not unlike its peers in the fertilizer business. Political volatility will continue Lindsay’s infrastructure slump. Bursting crop price bubbles and the waning of panic buying of irrigation systems could put a friction on Lindsay’s revenue and free cash flow later on in fiscal year 2013. Over the long term, Lindsay will benefit from expanding emerging economies, expanding populations and environmental awareness.
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