On Jul 12, we issued an updated research report on Lindsay Corporation LNN. Though the company is well poised on its Foundation for Growth initiative and introduction of technologically advanced products in the long run, weak demand for its irritation equipment owing to current weakness in North American agricultural markets and inflated costs continue to weigh on the stock..
Weak Demand to Weigh on Near-Term Results
On Jul 9, 2019 Lindsay reported third quarter fiscal 2019 (ended May 31, 2019) results, which fell short of the Zacks Consensus Estimates on both counts – earnings and revenues. Lindsay delivered adjusted net earnings of 50 cents per share in the quarter, which marked a decline of 70% from prior-year quarter while revenues suffered a drop of 29% to $121 million. Lower commodity prices and trade uncertainty weighed on irrigation equipment demand during the reported quarter. Further, strong Road Zipper System sales in the year-ago quarter led to the challenging year-over-year comparison. Lindsay’s backlog as of May 31, 2019 was $42.5 million, down from $55.8 million as of May 31, 2018.
Agricultural markets have been affected by lower commodity prices, reduced exports, as a result of the ongoing U.S-China trade dispute and the weakened currency. Further, per USDA’s latest available report, from March 2019, net farm income is anticipated to rise 10% to $69 billion in 2019. However, it still remains substantially below the 10-year U.S. net farm income average of $85.3 billion (in nominal dollars) primarily owing to weaker prices for most major crops. This weak forecast and lower commodity prices signal the likelihood of persistent constrained demand for irrigation equipment in North America. This will continue to limit Lindsay’s revenues.
Moreover, heavy rainfall and widespread flooding in many parts of the Midwest negatively impacted irrigation equipment demand during the May-end quarter.
Sales of the Road Zipper system have also been soft, of late. Moreover, the considerable duration required for completing these projects is a concern. Lindsay’s results will bear the brunt of a constrained government spending environment. In December 2015, the U.S. government enacted a five-year $305-billion highway-funding bill to fund highway and bridge projects — the first long-term national transportation spending bill in a decade. Though this provides stability, the funding levels have not increased.
Inflated Costs to Dent Margins
Lindsay 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. Inflated raw material costs will continue to impair the company’s margins.
Lindsay will also bear the brunt of elevated costs incurred in connection with its Foundation for Growth performance improvement initiative. Results for the third quarter of fiscal 2019 included pre-tax costs of $3.9 million in connection with the initiative, of which $3 million represents professional consulting fees. The company also incurred severance costs related to organizational changes. Lindsay anticipates incurring additional consulting fees in the fourth quarter of fiscal 2019.
Foundation for Growth Initiative to Generate Long Term Returns
Meanwhile, Lindsay remains focused on simplifying its business in order to improve productivity. In sync with this, Lindsay’s Foundation for Growth initiative had been launched in 2018. A key financial objective of the initiative is to achieve operating margin performance between 11% and 12% by fiscal 2020. The company is fully focused on gaining margin expansion in four primary areas — manufacturing footprint, G&A, the shared services activities, sourcing and commercial. Lindsay anticipates its irrigation operating margin performance in the United States to eventually benefit from the introduction of technologically-advanced products.
Share Price Performance
Over the past year, Lindsay’s shares have declined 6.3% against the industry's growth of 0.8%.
Zacks Rank & Key Picks
Lindsay currently has a Zacks Rank #5 (Strong Sell).
Some better top-ranked stocks in the Industrial Products sector are Roper Technologies, Inc. ROP, John Bean Technologies Corporation JBT and CECO Environmental Corp. CECE each sporting a Zacks Rank #1 (Strong Buy), at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Roper Technologies has an estimated earnings growth rate of 9.8% for the ongoing year. The company’s shares have gained 36% in the past year.
John Bean Technologies has an expected earnings growth rate of 5.9% for the current year. The stock has appreciated 38% in a year’s time.
CECO Environmental has a projected earnings growth rate of 84.8% for 2019. The company’s shares have gained 43% over the past year.
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