Lindsay Corporation: The Rainmaker

Corn prices are busting out all over, and so are shares of Lindsay Corp. (NYSE: LNN). Its irrigation systems make the rain that feeds the crops that keep farmers walking on air.

Lindsay has been making rain since 1955, when it started improving yields by making irrigation systems for various crops in different terrains and soils. Taking its name from its location—Lindsay, Neb., at the center of the United States—the company claims headquarters in Omaha. Now, Lindsay designs large scale, technologically advanced systems, and has become a global force in irrigation. Its main products are center pivot systems that propel irrigation equipment up and down hills. Its irrigation operations increase crop yields, conserve water and reduce labor and other costs.

Bin-busting profits make farmers more willing to put money into irrigation, which ensures output against nefarious weather. A new mouth to feed—the biofuel industry—and expansion overseas should earn profits for Lindsay in the near term and for several years to come.

Farm fortunes are notoriously volatile and cyclical, though. Lindsay has responded by accelerating its second division, infrastructure, to smooth these seasonal factors. Figuring that a growing world population will increase the need to ease road traffic and improve motorist safety, Lindsay makes equipment such as movable barriers, crash cushions and specialty barriers through its recently acquired subsidiaries, Barrier Systems Inc. and Snoline S.P.A.

Lindsay has succeeded in an industry that has undergone significant consolidation in the past few years. This means the company needs to continuously upgrade its offerings to compete. Helped by the resurgent agricultural marketplace and the returns from its infrastructure business, Lindsay has so far proven it is up for the challenge.

“As water becomes a more valuable resource, demand for water-efficient irrigation systems should continue to rise worldwide, and as a top-tier player in this market, Lindsay should experience solid growth in the years ahead—particularly internationally,” wrote analyst Ryan Connors at Boenning and Scattergood as fourth-quarter results were released Oct. 10. He said the fundamentals are in place for Lindsay to experience a cyclical increase in demand as pricing for agricultural commodities remains firm.

These are the times of Old MacDonald’s dreams. Corn prices are up about 40% from a year ago, soybeans about 80% and wheat’s virtually doubled. According to USDA, farm income is expected to rise 26% in 2007, to a record level of $87 billion, spurred by strong crop receipts, increased international demand and high income from livestock. Given the leading nature of farm income, Standard and Poor’s analyst Michael Jaffe said in a September note that he sees favorable conditions over the next 12 months for farm equipment manufacturers.

S&P expects strength to continue for an extended period in non-residential construction. Domestic spending on private non-residential construction during July 2007 was estimated at a seasonally adjusted annual rate of $346 billion, up 15% from the year-earlier level, said Jaffe.

And the S&P Construction & Farm Machinery & Heavy Trucks Index increased 30% year to date through Sept. 14, compared to a 5% increase for the S&P 1500. “Reflecting our positive outlook for the non-residential construction and farm markets, we believe there will be a number of companies whose stocks continue to outperform the S&P 1500,” Jaffe said.

Lindsay, with a market cap of $557 million, has not been outdone. Shares settled Thursday at $46.94, up 50% year-to-date. They are at the high end of a 52-week range from $28.65 to $51.99—the high set on fourth-quarter results on Oct. 10. Thursday’s close put shares at a P/E of 36.02 based on Connors’ estimate for earnings at $1.65 for 2008.

Lindsay earned $0.32 per share in the quarter ended Aug. 31, up 23% from $0.26 the previous year. Revenues were $74 million, up 30%. Total order backlog was $49 million, up 84% from last year.

For Connors, international growth in irrigation equipment is vital for revenues because Lindsay’s share is already high in the U.S. market. Connors said Lindsay expects international sales to grow to 50% of total irrigation revenue over the next several years, versus about 30% currently. International revenue in the fourth quarter was up 52% from year-ago and domestic irrigation sales were up 12%.

Revenues for fiscal 2007 were $282 million, up 25%. Irrigation equipment contributed $216 million, up 12% on the year, and infrastructure added $65 million, up 102%. Comparisons in infrastructure are difficult because of its acquisitions of Barrier Systems and Snoline.

Lindsay also has managed its balance sheet relatively conservatively over time and the company continues to do that, Connors said. At the end of the fourth quarter, long-term debt was 18% of total capitalization.

But domestic irrigation sales in units were virtually even with year-ago levels in the fourth quarter—despite increased acreage under tillage and steep commodity prices, and this is a concern. “With unit shipments sluggish, a key issue to watch in fiscal 2008 is whether higher agricultural commodities ultimately translate into stronger volume growth,” wrote Connors.

Shares also are pricey. Connors told SmallCapInvestor.com that performance would have to be pretty impressive on all fronts for Lindsay to maintain its current valuation. Connors initiated coverage in November 2006 with an “outperform” rating but scaled that back to market perform on Oct. 10, citing valuation. Now, below $45 per share is where the stock gets interesting again, he said.

Still, reflecting higher expectations for international sales, Connors raised his 2008 earnings estimate to $1.65 from $1.55 per share, and established a 2009 estimate of $1.90.

Lindsay (LNN) is an often overlooked investment on potent themes of the day: prosperous farm economy, fledgling biofuel demand and growing global needs for efficient water irrigation. The rain in Spain, and elsewhere, is where this company’s future lies.

Comments

[DanielJacome]

Nice call on LNN! Under the radar small cap - seeing 100 and just busted out, will ramp into it now for a long: looks like a nice bull flag formation which should lead to run higher: NO WAY the farm ecosystem is done ripping yet