On Oct 4, we downgraded our recommendation on steel pipe and tube company Valmont Industries, Inc. ( VMI) to Neutral. While the company should benefit from strong demand environment across utility and irrigation markets, we prefer to tread with caution factoring in a less favorable sales and earnings outlook for second-half 2013.
Why the Downgrade?
Valmont had a healthy second-quarter 2013 (reported on Jul 17) with profit surging year over year on gain from the sale of an Australian business and a double-digit rise in revenues. Both revenues and adjusted earnings beat Zacks Consensus Estimates. The company saw higher sales across its businesses in the quarter.
However, Valmont remains affected by a challenging operating backdrop in Europe. In its Engineered Infrastructure Products division, weak government infrastructural funding is hurting lighting and traffic product markets across North America and Europe.
Valmont is also exposed to volatility in raw material costs. Higher prices for key raw materials such as steel, aluminum and zinc, along with their reduced availability, may raise the company’s operating costs and reduce its profitability.
Moreover, the outlook for sales and earnings comparisons for the second half is less favourable than what witnessed in the first.
Nevertheless, Valmont is witnessing significant strength across the utility and irrigation markets. In the Irrigation segment, improving North American equipment demand and higher farm income is boosting sales and profitability. Moreover, the global transmission and distribution markets are seen as major long-term growth opportunities in the utility market.
In addition, Valmont is actively pursuing capacity expansion through new constructions and extension of existing facilities to meet the increasing demand from utility customers in North America.
Other Stocks to Consider
Other companies in the steel industry with favorable Zacks Rank are Companhia Siderurgica Nacional ( SID), Shiloh Industries Inc. ( SHLO) and Gerdau S.A. ( GGB). While Companhia Siderurgica and Shiloh maintains a Zacks Rank #1 (Strong Buy), Gerdau holds a Zacks Rank #2 (Buy).