- Investors should keep their biases in check.
- Industrial goods companies behave differently from consumer goods.
- Investing for the long-term represents your best bet for investing success.
- Lindsay’s solid balance sheet strengthens my holding resolve.
Source: Lindsay's website
On April 17, 2013, I bought shares in irrigation and infrastructure company Lindsay (NYSE: NYSE:LNN). My thesis stemmed from the fact that people will always need food and infrastructure for roads, railroads, etc. Moreover, at the time the company possessed rock solid fundamentals. However, Lindsay's fundamentals hit a brick wall in FY 2014. As a result, Lindsay's total return resides in the negative range at a gut wrenching 9% vs a positive total return of 39% for the S&P 500 (see chart below). Here are the lessons I have learned by owning this stock over the past two and a half years.
Beware of hindsight bias
When I first bought shares in Lindsay I was blinded by the bright light of excellent past fundamentals for the previous three years. The company expanded its fundamentals pretty consistently during that time (see chart below). I was really suffering from hindsight bias. The only downside I considered for the company at that time was a possible recession. I didn't really think about other factors that could affect demand such as weather, government budgets, etc. This leads into the next thing that I learned the hard way.
Industrial companies are different
Lindsay and its fundamentals reinforced to me that industrial companies vary from consumer goods companies, which represent my sector of choice. One of the biggest points for investors in industrial goods companies to consider is the absence of the repeatability of purchase. Candy consumers will buy bags of candies and when they run out will go back to the store to buy more. However, this doesn't necessarily happen with industrial goods.
A farmer may buy an irrigation system and not need another for years. A local government may need some barricades for a bridge construction, but the need dissipates once the project is complete. Moreover, weather can have a significant impact on demand for irrigation equipment. Amicable weather can create a good crop harvest leading to lower prices for a particular farm product. In turn, this lowers revenue for the farmer, lessening their propensity to make capital expenditures.
Lindsay has struggled in FY 2015. The company saw its overall revenue, net income and free cash flow decline 9%, 49% and 55%, respectively, year-over-year. This was gut wrenching to me. Low grain prices persisted compelling farmers to purchase less irrigation equipment from the company. The company enjoyed a 40% increase in its infrastructure revenue. However, its infrastructure revenue only accounted for roughly 19% of its overall revenue.
These steep declines reminded me that as a long-term investor in a publicly traded business (and part owner in a company), I need to weather the rough times as well as the good. Management offers the following reassurances in its most recent earnings announcement, "Longer term, drivers for the Company's markets of population growth, expanded food production and efficient water use, and infrastructure upgrades and expansion support our expectation for growth."
Lindsay's solid balance sheet also reinforces my long-term resolve for the company. In the most recent quarter, Lindsay showed $139 million in cash representing a whopping 48% of its stockholder's equity. I like to see companies with cash amounting to 20% or more of stockholder's equity to self-finance operations during difficult times, sustain dividends, fund product innovation, etc.
Also, Lindsay still keeps its long-term debt at manageable levels to minimize profit choking interest costs. In the most recent quarter, the company's long-term debt only amounted to 41% of stockholder's equity. In FY 2015, Lindsay's operating income still exceeded interest expense by 19 times. The rule of thumb for safety lies at five times or more.
Lindsay's dividend also encourages me to hang onto its shares. In FY 2015, Lindsay paid out a prudent 38% of its free cash flow. I like to see companies pay out less than 50% of their free cash flow retaining the rest for other uses. Currently, Lindsay pays its shareholders $1.12 per share per year yielding 1.8% annually.
In FY 2015, Lindsay's management plans on keeping costs under control, developing new products and expanding geographically. I am going to patiently hold my Lindsay shares with the understanding that demand will fluctuate based on many factors in addition to global economic forces. Successful investing, like everything else, means sticking with it through thick and thin.
This article was written by
Analyst’s Disclosure: I am/we are long LNN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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