Water Metering Stocks will Benefit from Severe U.S. Drought Conditions: BB&T Capital Markets Expert Research Analyst Sees Silver Lining in Lack of Clouds

Wall Street Transcript

67 WALL STREET, New York - August 30, 2012 - The Wall Street Transcript has just published its Utilities, Alternative Energy and Water Services Report offering a timely review of the sector to serious investors and industry executives. This special feature contains expert industry commentary through in-depth interviews with public company CEOs, Equity Analysts and Money Managers. The full issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

Topics covered: Water Infrastructure Development - Irrigation and Metering Technology - Water Industry Consolidation

Companies include: Lindsay Corporation (LNN), Valmont Industries, Inc. (VMI), and many others.

In the following excerpt from the Utilities, Alternative Energy and Water Services Report, an expert equity research analyst discusses the outlook for the sector:

TWST: What trends are you observing with regard to commodities on the futures market, and what do those trends indicate for irrigation companies, such as Valmont (VMI) and Lindsay (LNN)?

Mr. Williams: We've certainly seen a tremendous move in the commodity market recently. Looking at the spot price, from the end of June to most recently, we are seeing a $2 move in corn from $5.50 a bushel to $7.50 a bushel, and most of that is as a result of the severe drought conditions that we are seeing across most of the country. I've seen numbers that indicate as much as 75% of the crop is affected to some extent, some parts of the country obviously much more than others.

We've also seen some of the other major agricultural commodities move as well. Soy has moved from mid-$13 to, we are closing on $16 a bushel now. And then, for wheat as well, we've also seen a pretty large move there from $6 a bushel to closer to $9 - so very rapid inflation in the last few weeks here given some of the drought conditions that have persisted during most of the summer.

Traditionally, that would be very good for irrigation companies. Normally, what you would see is when you see rapid inflation in the commodities that traditionally would translate into high cash receipt for farmers, which is a very good leading indicator for farm equipment demand. Now, the only caveat to that is that up to a certain point that is a good thing. There is a tipping point, where if we start to see too much of the crop actually destroyed, that could leave farmers at a point where they actually have no crops to produce whatsoever, and at that point, they become totally reliant on government insurance to backstop them. And in that environment, economically, they are probably OK. They will be made partially whole by the insurance, but it could actually have a negative effect on demand.

Now obviously, this has all popped up in the last couple of weeks, I would say leading up until now what we've seen reported out of names like Lindsay (LNN) and Valmont (VMI). We've seen very good demand for irrigation machinery. Even before this recent run in commodities, we were still operating off of, essentially, the second most profitable year for farmers in terms of farm income history, so we were already operating off of a very good base. We've seen very robust growth in the first half of 2012, and my thought would be that we continue to see good sales in the back half of the year as a result of high farm incomes. The question just becomes where is that tipping point where farmers actually start to slow demand because of the sentiment and the crop destruction.

TWST: You have a "buy" rating on Valmont and a "hold" on Lindsay. What are the key differentiators between the two stocks in your mind?

For more from this interview and many others visit the Wall Street Transcript - a unique service for investors and industry researchers - providing fresh commentary and insight through verbatim interviews with CEOs, portfolio managers, and research analysts. This special issue is available by calling (212) 952-7433 or via The Wall Street Transcript Online.

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