Shares of Lindsay Corporation LNN have declined 9% year to date against the industry’s growth of 9%. Lindsay’s irrigation revenues continue to bear the brunt of weak farmer sentiment thanks to the sluggish North American agricultural market and trade dispute. On top of this, input cost inflations continues to put margins under pressure. The company will have to bear additional costs over the next several quarters associated with its Foundation for Growth initiative. Moreover, high steel prices will impact margins in the near term.
What’s Dragging the Stock Down?
The U.S Agriculture industry has been grappling with low commodity prices and sluggish farm incomes. Per the U.S. Department of Agriculture's (USDA) latest available projections, net farm income is anticipated to improved 10.2% year over year to $92.5 billion in 2019. However, it remains well below the high of $123 billion reached in 2013. This along with trade tensions, have made farmers cautious about spending on equipment and continue to constrain demand for irrigation equipment in North America.
The company utilizes steel as a major raw material to manufacture products. Steel prices in the United States increased primarily as a result of tariffs that were implemented on imported steel. Lindsay will bear the brunt of elevated costs incurred in connection with its Foundation for Growth performance improvement initiative. Results for fiscal 2019 included pre-tax costs of $15 million in connection with the initiative. The company also incurred severance costs related to organizational changes.
Will the Stock Rebound?
Nevertheless, the company remains optimistic regarding countering weakness in irrigation equipment demand by focusing on its infrastructure business. Lindsay’s Road Zipper System is a highly differentiated product that positively addresses key infrastructure needs such as reducing congestion, lowering carbon emission and increasing driver safety and consequently gaining popularity globally. Further, demand for the company’s transportation safety products continues increase driven by population growth and need for improved road safety. The company remains committed to growing this business.
The company remains focused on simplifying business in order to improve productivity. In sync with this, Lindsay’s Foundation for Growth initiative, launched in 2018, continues to progress and is bringing positive changes. A key financial objective of the initiative is to achieve operating margin performance between 11% and 12% by fiscal 2020. The company is committed toward margin expansion in four primary areas — manufacturing footprint, G&A, the shared services activities, sourcing and commercial. As mentioned earlier, while the company will incur additional costs regarding this initiative over the next several quarters, it is expected to improve the overall net earnings of the company in the long run. Lindsay is also poised to gain from focus on growth objectives, development of technology products and acquisitions.
We believe these factors will benefit Lindsay Corporation’s results going forward, and lift its share price. However, the stock will remain under pressure due to the abovementioned headwinds for the time being.
Zacks Rank & Stocks to Consider
Lindsay currently holds a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Industrial Products sector are Northwest Pipe Company NWPX, Tennant Company TNC and Sharps Compliance Corp SMED. All of these stocks sport a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today's Zacks #1 Rank stocks here.
Northwest Pipe has an expected earnings growth rate of 15.8% for the current year. The stock has appreciated 33% over the past year.
Tennant has a projected earnings growth rate of 29.8% for 2019. The company’s shares have rallied 17% over the past year.
Sharps Compliance has an estimated earnings growth rate of 500% for the ongoing year. In a year’s time, the company’s shares have gained 15%.
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