Lindsay Corporation: Earnings Preview

Mar.28.11 | About: Lindsay Corporation (LNN)

Lindsay Corporation (NYSE:LNN) is slated to release its second quarter fiscal 2011 results on Wednesday, March 30, 2011. The current Zacks Consensus Estimate for the second quarter is 71 cents, representing a 122% annualized growth.

With respect to earnings surprise, over the trailing four quarters, Lindsay fell short of the Zacks Consensus Estimate in the fiscal first quarter of 2011. In the fourth and third quarters of fiscal 2010, Lindsay outperformed the Zacks Consensus while earnings in the second quarter of fiscal 2010 were in line with the Zacks Consensus Estimate. The average earnings surprise was 20.9%, implying that Lindsay has surpassed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

First Quarter Recap

Lindsay delivered an EPS of 34 cents in its fiscal 2011 first quarter ended November 30, 2010, falling short of the Zacks Consensus Estimate of 49 cents and down 36% from 53 cents in the year-ago quarter. The decline was due to lower infrastructure revenues and higher operating expenses, which offset an increase in irrigation revenues.

Total revenues in the quarter were $89.2 million, up 4% year over year and in line with the Zacks Consensus Estimate of $89 million. Total irrigation equipment revenues increased 13% year over year to $60 million. On the domestic front, irrigation revenues perked up 14% to $36.6 million and international irrigation revenues upped 11% to $23.4 million. Infrastructure revenues however were a dampener, declining 11% to $29.2 million primarily from lower sales of QuickChange Moveable Barrier product.

Cost of operating revenues increased 8% year over year to $64.9 million. Gross margin contracted 280 basis points year over year to 27.2%. Infrastructure margins were lower primarily due to decreased revenues of higher margin QuickChange Moveable Barrier product. Irrigation margins were flat compared with the corresponding prior-year period.

Operating expenses increased 20.3% year over year on an absolute basis due to higher research and development expenses, higher personnel related costs, sales commissions for QuickChange Moveable Barrier product and the acquisition of Digitec Inc. The increase in operating expenses also included $0.7 million of incremental expenses for environmental monitoring and remediation as part of an ongoing development at its Lindsay, Nebraska facility. Operating margin plunged 560 basis points from the year-ago quarter to 7.4%.

Estimate Revision Trend

Analysts have upped their earnings estimates on Lindsay with no downward movement for the fiscal second quarter 2011, fiscal 2011 as well as fiscal 2012 implying that the analysts have an upward bias on Lindsay given strong crop prices. The current Zacks Consensus Estimate is 71 cents for the second quarter of fiscal 2011, reflecting a year-over-year growth of 122%. For fiscal 2011 and 2012, the consensus estimates are pegged at $2.29, up 15.7%, and $2.70, up 17.8%.

Agreement of Estimate Revisions

In the last 7 days, out of 6 analysts covering the stock, 1 analyst has upped the estimate for the second quarter of fiscal 2011. Over the span of the last 30 days, 3 have revised their estimates upward for the quarter. Of the 7 analysts providing fiscal 2011 estimates, 1 has upped the estimate over the last 7 days and over the past 30 days two analysts have increased their estimates. For fiscal 2012, one analyst out of the six covering the stock has increased the estimate.

Magnitude of Estimate Revisions

Over the past 30 days, earnings estimate for the second quarter of fiscal 2011 increased to 71 cents from the previous estimate of 68 cents per share. For fiscal 2011, during the past 30 days, EPS estimate went up from $2.21 to $2.28 per share. Finally, over the past 7 days, the estimate inched up by a cent to the current level of $2.29 per share. Earnings estimate for fiscal 2012 went down to $2.70 from $2.74 in the past 30 days.

Our Take

The company stands to benefit in the long term from demand for increased food production, driven by worldwide population growth, efficient water use, mounting need for biofuels and improving transportation infrastructure. Its strong balance sheet allows it to invest in both organic and inorganic growth initiatives.

The United States Department of Agriculture forecasts farm income to increase 19.8% in 2011 compared with 2010, despite a $20-billion jump in production expenses. The 2011 forecast is the second highest inflation-adjusted value for net farm income recorded in the past 35 years.

Lindsay’s irrigation segment will thus benefit from rising farm income and will reflect in its second quarter results. The irrigation segment also stands to benefit from a continuing shift from flood irrigation to more efficient systems and exposure to fast-growing international irrigation markets.

On the flipside, the outlook for the infrastructure segment remains cloudy due to government budget constraints and a delay in the congressional passage of a new federal highway bill. We thus maintain our Neutral long-term recommendation on Lindsay. The company currently retains a Zacks #2 Rank (short-term Buy recommendation) on the stock.

Omaha, Nebraska-based Lindsay Corporation is a leading designer and manufacturer of self-propelled center pivot and lateral move irrigation systems, which are used principally in the agricultural industry to increase or stabilize crop production while conserving water, energy and labor. The company also manufactures and markets infrastructure and road safety products. The company competes with Valmont Industries Inc. (NYSE:VMI).