- Valmont's share price was hit yesterday on concerns about Q1 revenue growth and pressure on margins.
- Top-line growth and margin deleveraging are expected to continue through most of 2014.
- Despite these larger macroeconomic conditions, Valmont continues to grow earnings, and shares are still meaningfully undervalued.
Valmont Industries (NYSE:VMI) released results of Q1 2014 earnings yesterday (April 23) that were largely in line with prior estimates, with revenue down 8.3% Y/Y to $751.7 million, and non-adjusted earnings falling 23.8% from 2013 to $2.20 per share. Comps were affected by a decline from record revenues in Q1 2013, which had been driven by historically high crop prices and weather conditions. Guidance for the remainder of year pointed to likely continued price pressures and flat earnings growth. Overall, results were as expected and appear to have been driven largely by macroeconomic conditions. As such, my investment thesis remains intact, though I'm making a modest adjustment to my cash flow model from $176 to $168. I believe that the company remains on solid footing and that pricing and sales pressures will eventually revert to the mean. I still believe that shares continue to offer a meaningful margin of safety after recent price action.
Revenues were most affected by declines in the Irrigation and Utility segments, which had delivered exceptional results in Q1 2013, with year-over-year revenue declines of 13% and 10%, respectively, and margin declines of 21% and 29%. These declines were only partially offset by growth in international markets. The Engineered Infrastructure Products segment reported mild growth on both top and bottom lines, driven in part by Valmont's recent acquisition of Northern European steel products maker DS-SM A/S (now Valmont-SM), which contributed $17.3 million to total revenues. Management reiterated guidance for the remainder of the year, issuing an outlook of diluted EPS of $10-$10.50, as operating margins in the Irrigation segment are deleveraged by lower commodities prices, but with favorable comps coming in the Utility Support Structure and Engineered Infrastructure Product segments, and with continued growth in international markets.
Overall, results in Q1 were largely in line with previous estimates. My base model had already incorporated a decline in revenue growth to 8% / year with stable margin growth, but I expect sales volume and operating leverage to continue to be depressed in the near term, with pressure on net margins to about 8%. Prolonged deleveraging of operating margins would cause me to lower my fair value estimate, but I expect commodities prices to recover and infrastructure spending to continue apace, and significant recovery of margins would obviously result in an upward revision of my estimate. Given the firm's long historical record of weathering challenges in the larger macroeconomic environment, I am staying long and would look to accumulate more shares on further weakness, particularly if the price drops below $140.
Disclosure: I am long VMI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am not an investment adviser, and this article represents my own opinions. Do your own due diligence and happy investing!