Lindsay Waters the World
Board: Value Hounds
Why would a profitable seemingly sane small company that sells irrigation equipment weight itself down with a completely unrelated business that has made positive operating income in only three out of the last seven years? Are they hopeless optimists thinking government is suddenly going to flood states with infrastructure money? Is this slow ugly business like the favorite wayward child they can’t give up on and wait for it to make good? It’s a complete mystery.
The company is Lindsay and they are a likeable small cap whose main business is selling irrigation equipment. Irrigation is a necessity when farming in areas that don’t have sufficient rainfall through out the growing season to support crops.
The irrigation system they sell are ones most people have seen. The pipe carrying the water is suspended between towers on wheels and these can span entire fields by putting sections of pipe and towers together. This type of irrigation is superior to simple gravity flooding techniques that waste a lot of water. Water across a lot of farmland is found in deep aquifers that are shrinking and it’s critical to conserve where possible. Lindsay sells a valuable necessary tool to farms. They also sell control panels and remote controls that track and monitor operations.
The Lindsay system does require more capital investment for a farmer. Running flooding from a ditch down rows of crops is cheap in materials but labor intensive and when crop prices support the investment in better irrigation, Lindsay does well. With nearly record high crop prices the past couple of years, irrigation has been a great business to be in. Road construction? Not so much and it’s a mystery why they continue to stand by the infrastructure segment. The business makes moveable barriers, road markers, crash cushions to cap steel barriers and guard rails, and plastic guard rails that mount under steel rails to protect motorcyclists. There is a lot more. Essentially, it’s all the items that go on roadways except the asphalt. Brisk road construction projects are key to keeping Lindsay infrastructure spending and that relies heavily on federal and state spending and we all know how governmental spending and budgeting is doing-------not well.
Management seems a bit conflicted about the infrastructure segment. On the one hand, they have just changed management and expect that will turn things around. The CEO is too optimistic that this constant laggard is going to be a turnaround story.
Richard W. Parod CEO
Well, the first part of that is that this time it is being filled internally with someone that I have a great deal of confidence in, in terms of being able to lead that business on a growth path.
The next stage to this, as we see the market turn around, is really developing a good growth strategy for this business going forward and looking for what we do to increase market penetration and really get back into a pretty aggressive forward-movement posture. And that's the strategy for the business, and I believe that is -- that's what we'll see going forward. It won't happen instantaneously because, obviously, the market is -- there's a bit of momentum there, but I'd say that we haven't seen the turnaround that we would like in that business and I think this is -- with new leadership, we'll see a new approach.
Later in the call when asked about what he would look for in new acquisitions, he as much as said they would look for more water businesses but steer clear of anything requiring government spending. That would mean the infrastructure segment will not be bolstered by acquisitions and he believes those types of businesses are not worth acquiring. Barring a miracle organic turnaround, infrastructure will never do much for Lindsay and has the potential to keep turning in negative numbers that detract from earnings. They need to fish or cut bait on it. I think they need to cut bait.
From the CEO:
Well the acquisition type that we're looking at today are really more towards, let's say, the water use efficiency side, more towards the water side. But I wouldn't rule anything out specifically. But that has been our primary emphasis, has been more on that water side than on the infrastructure side. And I think I've commented in the past that we really don't want a lot more in terms of government spending related or driven by government spending, specifically, but our primary emphasis has been more, let's say, industrial applications or on the water side
So why keep a poorly performing segment that relies on the government spending they want to avoid?
[See Post for Tables]
The growth or lack of in infrastructure is wildly erratic. It can go from millions in operating income one year back to negative earnings the next making growth unpredictable. Every time it drops into negative operating income territory, it takes earnings down. It’s not a great business and the optimism it can be turned around seems misplaced. It’s only saving feature is it continues to be a smaller and smaller part of the business.
Lindsay’s 2013 revenue was $690.9 million. Of that infrastructure was only $64.9 million in revenue with a ($800,000) in operating income decreasing consolidated net income It has had negative earnings in three of the past seven year. A turnaround looks like a long shot. Infrastructure profits have been damped down due to decreased government spending and high fixed costs that often result in annual losses. Management continues to expect a reversal since they believe the Road Zipper system is the best barrier choice in highway construction. Results over the past 5 years would ay otherwise. Lindsay has trailed the S&P small cap 600 by 61%.
Their recent acquisition of Claude Lakos is more in line with the best part of the business –irrigation/water management. Lindsay paid $29 million for annual revenues between $25-$30 million. Products include filters to keep sand out of drip irrigation systems and center pivots (Lindsay’s primary product), HVAC filters, and industrial filtration (ethanol, oil and gas desanding etc etc). It’s a good fit and potentially adds over 4% to revenue.
Combined results 2013
Annual revenue reached a record $690.8 million, increasing 25% year-over-year and net was $70.6 million -- $5.47 per diluted share. Q4 revenue was $148.4 million –20% higher than 2012. Irrigation sales were $128.2 million in the quarter, 16% higher than the same quarter last year. U.S. irrigation revenues, decreasing 4% over the same period last year, but international increased 44%. Revenues increased most notably in the Middle East (Iraq) and South America. Irrigation spending is sensitive to commodity prices and strong crop yields in Q4 dropped commodity prices. In spite of record high farm income, farm capex is being dialed down in anticipation of lower crop prices in 2014.
Annual 2013, total irrigation revenues increased 32% to $626 million in the U.S. and international irrigation revenue was $240.3 million, increasing 41% over previous year.
Bottom line is the irrigation business is growing and the best part of Lindsay.
Infrastructure continued to lag and drag on earnings. Infrastructure segment revenues were $20.2 million in the quarter, increasing only 2% with operating income of $2.4 million. For 2013, infrastructure revenues decreased 15% to $64.8 million, with a total segment operating loss of $800,000 compared to breakeven for fiscal 2012. Not so good and a negative to LNN earnings in 2013 and neutral in 2012 at best (please think about selling it guys).
The irrigation business will be negatively affected by reduced soybean and corn prices in 2014. They don’t give a figure for revenue. International should continue to accelerate in the Middle East and perhaps see some expansion in China and Russia. Again no solid projections are given. They are planning to expand capacity to accommodate international sales increases. In Q4 Lindsay collected $17.4 million of revenue from the Iraq and $33 million for the year. Even without Iraq, revenues grew 22% in 2013.
For infrastructure, government spending on highway and other infrastructure projects remains an impediment to growth. They do not anticipate a strong turnaround in government infrastructure spending in 2014. They are still in my opinion unjustifiably optimistic they have sizable market penetration opportunities for road safety products and Road Zipper system sales worldwide, and we've seen some positive signs of increased infrastructure activity. Of course they know their business better than I do, but historic returns don’t warrant much optimism.
It may sound like there’s not a lot to like about Lindsay, but the water business is good and promises to grow and stay relevant in a world that needs food from land that has to be irrigated. International growth looks promising.
They are a small company with only 12.9 million shares outstanding. It stays about the same and in five years has only increased by 3.5%. Insiders don’t own much at only 2.3%.
Free cash flow is positive year after year and the company pays a very small dividend. They pay 52¢ currently and the yield is only 0.7%.
Free cash flow yield is only 2% in 2013. Without the acquisition that was uncharacteristically large it increases to 5%. Not a great yield with the relatively high price per share. Even though it’s close to a 52-week low, it’s still a shade pricey with a PE at 14 and EV/EBITDA around 7%. Lindsay is not a great value but not bubbly either. With the drag of infrastructure it would be better to get it cheaper.