Lindsay Manufacturing: Raining Profits

Nov. 7.06 | About: Lindsay Corporation (LNN)

Lindsay Manufacturing (NYSE: LNN) is a leading maker of center-pivot and lateral-move irrigation systems for the agriculture industry. Lindsay sells its Zimmatic irrigation systems through a worldwide network of dealers to farmers in more than 90 countries. Its electrically powered irrigation systems are designed to use both water and labor more efficiently than do traditional "flood" or "surface" irrigation systems. Lindsay makes and sells replacement parts for its products, and manufactures and distributes large-diameter steel tubing.

Earnings look like they've been well watered and flourishing at LNN. Hitting a decade low of 41 cents in 2005, they are rebounding nicely. In 2006 (fiscal year ends in August), earnings per share were $1.00. This year, analysts are looking for $1.30. Revenues are growing as well, going from $177.3 million in 2005, to $226 million last year. Look for $260 million this year. Over the next 5 years, analysts believe earnings will grow at an average annual rate of 22% while revenues march upward at 9.5%, on average, per year.

Investors have taken notice of the good news. The stock has risen to new heights, recently hitting $34.70 (price reflects a 3 for 2 stock split in 1998). The valuation is also hitting new all time highs with the stock carrying a P/E (price to earnings) ratio of 32. The average annual p/e has been in the low 20's for most of the last 5 years with the exception of 2004 when it was 30. The current p/e ratio is about 1.7 times the average p/e for all stocks reporting earnings.

Recently, LNN moved into another, water related industry: water barriers. It acquired Barrier Systems, a manufacturer of movable traffic and safety barriers on June 1. In the most recent quarter, the new company contributed $10.3 million in sales and $2.6 million of profits. That was 55% of operating profits in a quarter that has traditionally been one of two quarters that are slow for LNN. The current quarter is the other one. Domestic irrigation systems sales rose 24% in the August quarter of this year compared to the same quarter last year. The increase in sales was attributed to a drier season than normal in the West and higher demand for corn due to ethanol production.

With all the good news, there is some caution required. Sales are dependent on crop prices and interest rates, the latter because an irrigation system costs about $70,000. And of course crop prices depend on the weather and the volume of any one crop. Corn has benefitted from the new push for bio-fuels, in particular ethanol. If that demand increases, it should benefit LNN for several years.

Some of the other numbers: there is a very small amount of debt, about $30 million. Officers and directors own about 6.5% of the stock while 6 large institutional buyers own a total of 57.5%. That doesn't leave a lot of stock to trade for this small-cap company with only 11.6 million shares outstanding. Return on Equity is growing, up from 4.4%in 2005 to 9.7% this year to an expected 11% next year. Current assets outweigh current liabilities by more than 3 to 1. There is a small dividend that has been increasing.

This stock has an interesting niche. While small, the company has been growing successfully, especially in the last few years. With increased demand for corn, more farmers will need more irrigation systems. That suggests better times ahead for LNN, as long as the weather holds and competition doesn't heat up too much and interest rates don't go too high. But remember, investors already are pricing plenty of good news into the stock as it hits new highs.

The question is: has the price gotten a little ahead of the earnings? Time will tell.

Disclosure: Author has no position in LNN