Lindsay to Shine on Growth Efforts, Agriculture Market Soft

On Apr 6, we issued an updated research report on Lindsay Corporation LNN. The company is poised to gain from its focus on growth objectives, growth of technology products and strong order backlog. However, lackluster agricultural market in North America and elevated costs are expected to dent its performance in the near future.

Let’s illustrate the factors in detail.

Lindsay to Gain From Focus on Growth Objectives

Lindsay is expected to benefit from its focus on growth objectives, which includes setting strategic direction, defining priorities and improving overall operating performance. One of its key financial objectives is to achieve operating margin performance between 11% and 12% in fiscal 2020.

The company’s ongoing improvement plan will also position it in a better competitive position. In sync with this, Lindsay internally eliminated four senior leadership positions during second-quarter fiscal 2018. In addition, it has hired a renowned consulting company to initiate a diagnostic review of the entire company, mainly through simplification of the business and cost reductions.

Strong Backlog to Fuel Lindsay's Sales

Lindsay’s order backlog at the end of the fiscal second quarter improved around 45% year over year, reflecting an increase in backlog in the Irrigation and Infrastructure segments. The backlog includes an order to deploy a Road Zipper system on the Richmond-San Rafael Bridge near San Francisco and follow-on orders from an existing customer in Japan. These orders are expected to be delivered in the third and fourth quarters of fiscal 2018. The company also expects its backlog to improve, backed by the Alex Fraser Bridge project.

Growth of Technology Products Remains a Catalyst

Lindsay anticipates its irrigation operating margin performance in the United States to benefit from the strength and growth of technology products. The company’s launches of several latest products are projected to meet the MASH standards for road safety hardware. Further, the company’s FieldNET Advisor — an irrigation management solution — will enable growers to maximize profitability through better irrigation management.

Dismal Agricultural Market to Hit Performance

North American agricultural market conditions are expected to remain challenged due to lower commodity prices and farm income. Per the latest United States Department of Agriculture’s (USDA) report, net farm income is estimated to decline around 7% to $59.5 billion in 2018 from 2017. Further, the company expects commodity prices to remain constrained following record harvests in 2017, in the United States, as well as due to high stock levels. These factors will impact Lindsay’s irrigation revenues.

Also, China is planning to levy retaliatory tariffs on U.S. agricultural exports, particularly soybeans, sorghum, and live hogs. This would hit farmers further and impact demand for irrigation equipment.

Elevated Costs to Mar Profit

Lindsay will bear the brunt of elevated costs incurred in connection with its Foundation for Growth performance improvement initiative. Its fiscal second-quarter results include pretax costs of $2.3 million, comprising severance costs and professional consulting fees incurred in connection with this initiative. The after-tax impact of these costs amounted to $1.7 million or 15 cents per diluted share. Additional costs are anticipated in connection with this initiative over each of the next several quarters, which will impact the company’s earnings.

Share Price Performance

Lindsay has underperformed its industry with respect to price performance in a year’s time. The stock has lost around 1.6%, while the industry has recorded growth of 29% during the same time frame.

Zacks Rank & Stocks to Consider

Lindsay carries a Zacks Rank #3 (Hold). Better-ranked stocks in the same sector include H&E Equipment Services, Inc. HEES, Komatsu Ltd. KMTUY and Deere & Company DE. While H&E Equipment Services sports a Zacks Rank #1 (Strong Buy), Komatsu and Deere carry a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

H&E Equipment Services has an expected long-term earnings growth rate of 14.4%. The company’s shares have surged 48% over the past year.

Komatsu has a long-term earnings growth rate of 31.7%. The company’s shares have rallied 24% in the last year.

Deere has an expected long-term earnings growth rate of 5.7%. The stock has gained 32.6% in a year’s time.

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