Update: Lindsay's 2014 Results Expose Weakness

| About: Lindsay Corporation (LNN)

Summary

Lindsay's 4Q results look good only thanks to irregular storm-related revenue.

Revenue is driven by agricultural cycles and commodity prices and is not resilient; margins are already under competitive pressure.

The dividend is safe and the balance sheet clean, but the stock price close to $80 indicates a premium instead of a margin of safety.

Almost a year ago, I wrote an article on Lindsay, suggesting that it is a promising buy around $80. The price is mostly unchanged since then, but I no longer view the company as attractive at this price. My mistake was a too shallow understanding of agricultural cycles: the trough of 2009 might not have been such a trough, after all, and crop prices could go even lower from the present level, or stay low for much longer than I expected. I suggest the readers to check an enlightening article on this topic.

Results for the 4th quarter and full year 2014 show a steep decline in revenues and profits. The decline is masked in the 4th quarter by about $15 to $20 million of additional sales caused by replacement of irrigation equipment damaged by exceptionally strong storms. Excluding storms and the Lakos acquisition, US irrigation is down 26%. International irrigation is down too because of political instability in Iraq and Russia. Earnings per share declined from $5.47 to $4 despite the company repurchasing about 4% of outstanding shares. I will quote two important points mentioned by the management during the 4th quarter conference call:

"Certainly if we were just talking about corn, we'll see farmers buying irrigation equipment at the current corn prices without a doubt."

"...at the end of the quarter we are hearing from our dealers that intensity was increasing a bit and that one of the competitors was discussing some pricing changes. In the past cycles we've typically seen selling margins decreased from peak to trough levels. And it could be anywhere from three to five percentage points. So it wouldn't surprise us if the competitive intensity increases and it does affect margins at some point in the process."

So even if revenues hold flat, pricing pressure is likely to reduce profits, and if corn or other commodities get even cheaper, revenues might fall and profits entirely disappear. Infrastructure revenues were up in 2014 and will be up in 2015, but don't count on that. In 2014 it was barely enough to turn operating profit, and net income from infrastructure is negligible compared to irrigation.

There are positives, on the other hand: the company has zero long-term debt and about $120 million of excess cash that is planned to be used for share repurchases, but only at attractive prices. The company pays 27 cents of quarterly dividend, so the dividend yield has roughly doubled to 1.4%. In addition, the dividend is very safe given the cash on hand; the company intends to increase it in the coming years. The long-term drivers of irrigation business are as much relevant as ever, I have just overestimated their impact on Lindsay's results. I am quite confident that LNN will stay in business for many years to come, but short-term stock price volatility could be much higher than I imagined before, and shareholder returns will be hit by the present weakness in crop prices. Although I think LNN is capable of delivering long-term returns of 5-10%, it is neither cheap nor as safe as I thought before.

Disclosure: The author is long LNN.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am keeping my rather small older position in LNN mainly for study purposes, but would not initiate a new long position.

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Tagged: , Farm & Construction Machinery, Earnings
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