Lindsay Corp (NYSE: LNN) is an agricultural and transportation equipment manufacturer specializing in water management as well as highway infrastructure products. The company has benefited from high farm prices dating back to the start of the pandemic, leading to increased demand and supporting strong sales. Indeed, the company has just published its latest quarterly results highlighted by impressive operational dynamics and firming margins. The stock was a big winner in 2020, but has spent much of the past year consolidating gains, including more recent volatility. We like LNN as a high quality name backed by strong fundamentals overall. A growing order book establishes a strong year 2022 and a positive long-term outlook. That said, we believe the company will be challenged to significantly outperform expectations, which may limit the upside in equities in the near term.
LNN Revenue Summary
Lindsay announced its first quarter fiscal 2022 results on Jan.6 with EPS of $ 0.72, which exceeded expectations by $ 0.16. Nonetheless, operating profit of $ 13.4 million, up 77% year-over-year, highlights the underlying trend in profitability. Management explains that net income was impacted by a LIFO inventory adjustment that reduced EPS by $ 0.41, perhaps not fully factored into the consensus estimate. The operating margin at 8.0% is up from 6.9% during the period last year.
(The source: Company RI)
Total revenue of $ 166.2 million climbed 53% year-over-year and was a strong beat from the market estimate of $ 140 million. About 90% of the business is related to irrigation products and within that amount the strength this quarter came from international customers whose sales climbed 94% year-on-year to $ 66.9 million, including including momentum in markets such as Brazil and the Middle East. For irrigation in North America, sales climbed 50% year-on-year to $ 79.0 million.
Higher prices for soybeans and corn have made it possible for farmers and agribusinesses to invest in these types of mechanized irrigation solutions that also include water management software. On this point, strong sales of remote monitoring “tech” helped with the margins. Higher average selling prices were a theme during the quarter, helping to offset some production cost pressures from rising raw materials.
The small infrastructure segment is primarily based on the company’s proprietary mobile barrier system known as “Road zipperIt is a specialized vehicle that municipalities use to quickly place a flexible wall on the road intended to divert traffic either to manage congestion or for construction work. $ 20.2 million in the quarter was down 4% year-over-year although the company notes that this segment is generally volatile depending on the timing of large orders.
Lindsay expects to benefit from the Infrastructure and Jobs Act (IIJA) last year, which includes more than $ 370 billion for road infrastructure projects in the United States over the next 5 years as demand growing number of road safety products like the Road Zipper. In the irrigation and infrastructure segments, the backlog reached $ 155 million, up 89% from the period last year.
(source: RI company)
The company ended the quarter with $ 114.9 million in cash and cash equivalents which covered nearly $ 115.5 million in long-term debt. With a current financial rate of 3.0x, we see the balance sheet and liquidity position as a strong point of the company’s investment profile. Notably, Lindsay pays a quarterly dividend of $ 0.33 per share which earns about 1%.
Although management does not offer a financial forecast for the coming year, the company targets annual organic revenue growth “above 5%” over the next 5 years, while intending to generate growth. EPS greater than 10% per year on average. The operating margin target above 12%, if achieved, would be an improvement over this last quarter which the company says will be driven by new value-added products. The company also intends to generate dividend growth while considering opportunistic stock buybacks.
(The source: Company RI)
LNN share forecasts
There’s a lot to like about Lindsay Corp between its exposure to agriculture and its diversification into the road infrastructure markets. At a high level, the company benefits from “megatrends” like the growing food shortage that requires solutions such as its irrigation products to maximize crop yields and sustainability efforts. The Road Zipper represents a solution to deal with traffic congestion as well as increased efforts to improve safety during construction. Lindsay’s push to develop integrated technology with hardware and software models adds to its competitive advantage.
(Source: RI company)
Looking at the stock stock, as we mentioned, LNN had a big 2020 when it more than doubled to finally hit $ 180 per share in early 2021. While the stock sold at around 23% from its highs, LNN has been pretty much flat in the past year. In other words, frustrating volatility for investors. Part of the challenge here follows the broader macroeconomic trends where valuations reached extreme levels in parts of the market in the first quarter of last year amid perhaps overly optimistic expectations. With a half-full glass-like view, the correction helped balance the valuation favorably while the long-term outlook for the company remains strong.
Consensus estimates are that the revenue forecast is expected to reach $ 689 million this year, up 21% from 2021. The outlook for EPS also to increase 22% to $ 4.75 implies broadly stable margins. . Looking ahead, the market predicts that revenue growth will normalize around 5% between 2023 and 2025, while EPS may be increased as the company enjoys higher margins in the future. The bullish argument for the stock is that there is some advantage to these estimates which could prove to be conservative.
In terms of valuation on a relative basis, it is difficult to find a direct comparison with Lindsay given its unique business model between agricultural irrigation products and road equipment. Among a group of leading industry names like Caterpillar Inc. (CAT), Deere & Co (DE) or The Toro Company (TTC), we believe all of these companies capture similar macro themes. Lindsay trading at a futures P / E of 28.5x stands out as a premium for the group over TTC at 25x, CAT at 18x and DE at 17x.
On the flip side, on an EV versus consensus EBITDA forward, we point out that these four stocks are trading at a closer valuation between 14x and 16x, which makes LNN more reasonable. Within this group, we argue that LNN deserves a premium over earnings given its leadership position in its particular product categories. LNN’s effectively zero net debt on its balance sheet may also support a higher valuation multiple in our view.
We value LNN shares as held with a target price of $ 160.00 representing a forward P / E of 35x or 18.5x on an EV to forward EBITDA basis. While our price target is around 16% above the current share price, that rise is probably not enough to take strong bullish conviction. We would be LNN buyers on any correction below $ 120 which would help improve the reward / risk ratio setup.
The main risk to consider is the possibility of a broader macroeconomic slowdown and lower agricultural prices which would likely put pressure on the sales environment. Weaker-than-expected results in the next quarter may force a reassessment of the long-term earnings outlook.
Overall, we feel the company is close to fair value and challenged to significantly exceed what are already high expectations, especially on the earnings side. In the longer term, we want to see this operating margin converge more towards the long-term objective of the company. A more constant drive to grow dividends supported by an acceleration in free cash flow could encourage a higher valuation.