On Mar 21, 2013, we downgraded our recommendation on designer and manufacturer of self-propelled center pivot and lateral move irrigation systems, Lindsay Corporation (LNN) from Outperform to Neutral, driven by recovery in the U.S. construction sector, increase in backlog, and robust demand for irrigation systems in the domestic markets driven by drought conditions.
However, non-recurrence of drought conditions in the future, which can affect the company’s ability to maintain similar year-over-year growth, and weak international sales in the quarter remain concerns.
Why the Downgrade?
Demand for irrigation systems in the domestic markets will remain high, driven by high crop prices and drought conditions, leading to prolonged spending in irrigation equipment through 2013. According to the U.S. Department of Agriculture, U.S. farm income will be a record $128.2 billion in 2013, up 14%.
This will be driven by high market prices and crop insurance payments that will offset losses from the drought. Prices for corn, wheat and soybeans are projected to remain historically high and above the pre-2007 levels.
U.S. construction is finally stabilizing and is on the road to a much-awaited recovery. The American Institute of Architects projects a 5% increase in spending in 2013 for non-residential construction project and 7.2% for 2014. This in addition to the passage of the new Highway Bill through 2014 will benefit Lindsay’s infrastructural business.
Backlog increased 61% year over year to $85.1 million as of Nov 30, 2012, and 49% sequentially from Aug 31, 2012, led by U.S. irrigation order strength. The increase in backlog will drive strong results in the next quarter.
For fiscal 2012, approximately 36% of Lindsay’s consolidated revenues were generated from international sales. International sales declined 6% in the first quarter due to difficult comparisons and the absence of a meaningful project in the Middle East in the prior-year period.
The ongoing instability in the U.S. and international markets along with the global recessionary concerns and the slow economic recovery could adversely affect the ability of farmers and government agencies to buy and finance irrigation equipment and highway infrastructure equipment.
The drought in the U.S was a significant factor in driving sales in the first quarter. Even though the company expects 2013 results to benefit from prevailing weather condition in the U.S, this is not expected to contribute to similar year-over-year growth in the future.
Other Stocks to Consider
Lindsay Corporation currently retains a Zacks Rank #3 (Hold). Other stocks in the same industry with favorable Zacks ranks are Alamo Group, Inc. ( ALG), Briggs & Stratton Corporation ( BGG) and CNH Global NV ( CNH), which carry a Zacks Rank #2 (Buy).
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