On Jan 22, we issued an updated research report on Lindsay Corporation LNN. The company is well poised on its Foundation for Growth initiative to simplify business, improve productivity and margins. However, current weakness in North American agricultural markets, lower backlog and inflated raw material prices remain near-term headwinds.
Weak Domestic Agricultural Market to Dent Performance
Lindsay reported adjusted net income of 38 cents per share in the first quarter of fiscal 2019 (ended Nov 30, 2018), lagging the Zacks Consensus Estimate of 47 cents. Market headwinds in North America hindered demand for irrigation equipment in the reported quarter. The company’s backlog of as of Nov 30, 2018 was $48.9 million, down from $80.3 million as of Nov 30, 2017. This can attributed to a decrease in both Irrigation and Infrastructure backlogs.
The North American agricultural market is likely to remain under strain from lower commodity prices and farm income. Commodity prices remain under pressure owing to a record soybean and near-record corn harvest. Further, it was affected by diminished export prospects owing to the ongoing trade dispute with China. As of November 2018, corn prices rose around 2% while soybean prices have slumped 12% year over year. Further, per the United States Department of Agriculture (“USDA”) latest available report, net farm income is likely to decline around 12% to $66.3 billion in 2018 from 2017 — substantially below the 10-year average of $86.9 billion owing to weaker prices for most major crops. Lindsay’s revenues will continue to bear the brunt of weakness in the domestic agricultural markets.
Inflated Costs a Woe
Steel is a major raw material for Lindsay to manufacture its products. Steel prices in the United States have increased throughout fiscal 2018, primarily as a result of tariffs that have been implemented on imported steel. In addition, freight costs in the United States have increased owing to a general trucking shortage.
Lindsay will also bear the brunt of elevated costs incurred in connection with its Foundation for Growth performance improvement initiative. Its fiscal 2018 results include pre-tax costs of $9.7 million, including the loss from business divestitures along with severance costs, plant closing costs and professional consulting fees. Results for the first quarter fiscal 2019 included pre-tax costs of $4 million in connection with the initiative. Notably, professional consulting fees comprised $3.8 million, while severance costs and loss on sale of a business formed the remainder.
Potential Headwinds in the Infrastructure Business
Lindsay’s infrastructure business continues to generate growth on the back of strong order activity for the Road Zipper projects. Road Zipper 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. However, the considerable duration required for completing these projects is a concern. Further, a constrained government spending environment will weigh on the segment’s performance.
Share Price Performance
Over the past year, Lindsay’s shares have dipped 3%, compared with the industry's decline of 4.9%.
Zacks Rank & Stocks to Consider
Lindsay currently carries a Zacks Rank #4 (Sell).
Some better-ranked stocks in the sector include Alarm.com Holdings, Inc. ALRM, CECO Environmental Corp. CECE and Enersys ENS. While Alarm.com Holdings sports a Zacks Rank #1 (Strong Buy), CECO Environmental and Enersys carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Alarm.com has a long-term earnings growth rate of 17%. The stock has appreciated 53% over the past year.
CECO Environmental has a long-term earnings growth rate of 15%. The company’s shares have gained around 39% over the past year.
Enersys has a long-term earnings growth rate of 10%. Its shares have gained 11% over the past year.
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