Lindsay (LNN) Stock Plunges 25% YTD: Is a Revival Likely?
Lindsay Corporation’s LNN shares have lost 24.7% so far this year compared with the industry’s 5.1% decline. This mainly reflects the weakness in the company’s irrigation volumes in the past three quarters of fiscal 2023. The general economic uncertainty has negatively impacted farmer sentiment leading them to delay their investment decisions for irrigation equipment and projects.
Lower Irrigation Revenues Hurt Results
In the first quarter of fiscal 2023, LNN had reported 6% growth in revenues which marked a deceleration from the 23.8% growth in the fourth quarter of fiscal 2022. The situation worsened further, with the company revenues declining 16.9% and 23.2% in the second and third quarter of fiscal 2023, respectively.
LNN’s operating revenues for the first three quarters of fiscal 2023 decreased 13% to $507 million. This was mainly attributed to the 14% decline in irrigation revenues. Revenues were down 10% year over year in North America due to low unit sales volume, which was partially offset by higher average selling prices.
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Per the U.S. Department of Agriculture’s latest report, net farm income in the United States is expected to be around $141.3 billion in 2023. This projects a year-over-year decrease of 22.8% and is based on the reduction in government support payments and a 4.3% decline in cash receipts for crops.
Lower farm income, higher interest rates and concerns regarding general economic uncertainty have weighed on farmer sentiment in this year so far. Amid this scenario, they have put a rein on their capital investments, which in turn impacted Lindsay’s results.
International irrigation revenues for the nine months ended May 31, 2023, were down 20% year over year. The decrease resulted primarily from the completion of a large Egypt project in the prior year, which was not repeated this year as well as lower sales volumes in Brazil, Australia, Ukraine and Russia. Sales and order activity in Brazil were delayed in the second and third quarters connected with the federal government transition.
Even though the company has noted some easing in the inflationary impact on input costs, higher operating expenses continue to be a headwind. LNN witnessed a 9% rise in operating expense in the nine months ended May 31, 2023. The increase resulted primarily from higher employee incentive expense, increased spending on new product development and increased personnel costs.
Lindsay had also been witnessing supply-chain constraints, particularly in electronics. Constraints on the availability of raw materials, labor and trucking resources have led to higher lead times for deliveries.
The company has a market capitalization of around $1.4 billion. It currently carries a Zacks Rank #3 (Hold). Let’s discuss the factors that indicate that the stock might stage a comeback.
Improving Commodity Prices Bode Well
Recently corn and soybean prices have gained, as unfavorable weather has raised concerns that supply could miss expectations. Given that corn and soybeans are the most important grains for cash crop farming, this might boost order levels for Lindsay. Also, the company has been able to maintain its pricing while inflationary pressure on raw material and logistics costs have moderated. This will support its revenue performance.
Demand to Pick up Eventually
The farm size has been on the rise in the United States, which requires more laborers. Given the escalation in labor costs every year, farmers are resorting to farming equipment to replace labor. They are shifting to mechanized irrigation due to water and energy savings, improved yield, and cost effectiveness. This bodes well for Lindsay. The need to replace aging equipment will also sustain demand. The company has the potential to grow its revenues in international markets where irrigation use is less developed.
The infrastructure business continues to be driven by the company's transportation safety products, the demand for which largely depends on government spending for road construction and improvements. The Infrastructure Investment and Jobs Act has introduced $110 billion in incremental federal funding for roads, bridges and other transportation projects. This is expected to boost the segment’s revenues fiscal 2024 onward.
Lindsay’s strong balance sheet provides ample capacity and flexibility to fund organic growth initiatives and strategic acquisitions, while also returning capital to shareholders.
Stocks to Consider
Some better-ranked stocks from the Industrial Products sector are Caterpillar Inc. CAT, Astec Industries, Inc. ASTE and Eaton Corporation plc. ETN. CAT and ASTE sport a Zacks Rank #1 (Strong Buy) each and ETN has a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Caterpillar has an average trailing four-quarter earnings surprise of 18.5%. The Zacks Consensus Estimate for CAT’s 2023 earnings is pegged at $19.81 per share. The consensus estimate for 2023 earnings has moved 11.4% north in the past 60 days. Its shares have gained 51.6% in the last year.
Astec has an average trailing four-quarter earnings surprise of 20%. The Zacks Consensus Estimate for ASTE’s 2023 earnings is pegged at $2.81 per share. The consensus estimate for 2023 earnings has moved 4% north in the past 60 days. ASTE’s shares have gained 22.8% in the last year.
The Zacks Consensus Estimate for Eaton’s 2023 earnings per share is pegged at $8.80. The consensus estimate for 2023 earnings has moved 4% north in the past 60 days. It has a trailing four-quarter average earnings surprise of 3%. Shares of ETN have rallied 68.8% in the last year.
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