On May 29, 2014, we issued an updated research report on Lindsay Corporation (LNN). This leading designer and manufacturer of self-propelled center pivot and lateral move irrigation systems reported disappointing results for the second quarter of fiscal 2014 (ended Feb 28, 2014). Earnings per share came in at $1.04, down 31% year over year.
Lindsay’s earnings have suffered a decline in the first two quarters of fiscal 2014 due to significantly lower agricultural commodity prices, which affected domestic irrigation revenues. The U.S. irrigation market has slowed down significantly compared with the past several years of record crop prices under significant drought. The current forecast for 2014 U.S. net farm income is 27% below 2013. Tempering of drought conditions and crop price declines will affect domestic irrigation sales for the balance of fiscal 2014.
The potential for an increase in international irrigation revenues as well will be challenging for the remainder of fiscal 2014 since prior-year irrigation revenues included $33.4 million from the equipment purchases in Iraq. The current political environment regarding Russia and Ukraine may further limit international irrigation equipment growth.
A number of recent and potential regulatory actions could further impact Lindsay’s business. Certain tax incentives (such as Section 179 of income tax deduction and bonus depreciation) that encourage equipment purchases were significantly reduced for 2014. The ethanol mandate that increases corn demand has been reduced. The U.S. government has imposed trade sanctions that could impact irrigation equipment purchases in Russia and Ukraine.
Lindsay’s backlog at the end of the second quarter was $89.3 million, up from $86.6 million at the end of the first quarter. The improvement was solely driven by increase in backlog in infrastructure markets which offset weakness in irrigation markets, both domestic and international. The backlog includes a $12.8 million Road Zipper System order for Golden Gate Bridge that will likely be installed in the first quarter of fiscal 2015.
The infrastructure segment’s revenues increased 32% year over year to $16.9 million in the second quarter that is otherwise the lowest seasonal quarter for the segment. Infrastructure demand has increased in recent quarters as the company aggressively pursued market expansion. The company believes it has sizeable market penetration opportunities for road safety products and Road Zipper Systems worldwide. Demand for its transportation safety products continues to be driven by population growth and the need for improved road safety.
In Jan 2014, Lindsay announced its capital allocation plan, which lays out the company’s intent to make investments in order to attain revenue and earnings growth, along with enhancing returns to shareholders. Lindsay intends to repurchase shares worth $100 million to $150 million over the next 24 months and increase its dividend annually. The company has targeted a cash balance of $60 million to $75 million for 2014 and prioritization for cash use is – investment in organic growth including capital expenditures, mainly for increasing capacity.
In line with these moves, Lindsay announced a 100% increase in annual dividend from 52 cents per share to $1.04 per share, reflecting a yield of 1.3%. During the first half of fiscal 2014, the company repurchased 78,520 shares of common stock for an aggregate purchase price of $6.6 million. The remaining amount available under the repurchase program was $143.4 million as of Feb 28, 2014. Further share repurchases will provide support to the stock.
Lindsay currently carries a Zacks Rank #4 (Sell).
Key Picks from the Sector
Some better-performing stocks that are worth considering in this sector include Caterpillar Inc. (CAT), Gorman-Rupp Co. (GRC) and Komatsu Ltd. (KMTUY). All of these sport a Zacks Rank #1 (Strong Buy).
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