Lindsay Corp Remains Neutral (ALG) (CNH) (LNN) (VMI)

On May 3, 2013, we maintained our Neutral recommendation on designer and manufacturer of self-propelled center pivot and lateral move irrigation systems, Lindsay Corporation (LNN). It was based on expected benefits from recovery in the U.S. construction sector, new Highway Bill, increase in backlog, and robust demand for irrigation systems in the domestic markets. However, non-recurrence of drought conditions in the future, which can affect the company’s ability to maintain similar year-over-year growth, and ongoing instability in the international markets remain concerns.

Why Reiterated?

Lindsay reported second-quarter 2013 earnings per share of $1.50, up 50% from the last-year quarter, led by higher demand for irrigation equipment, expansion in irrigation margins, strong pricing environment combined with increased productivity and cost leverage.

Demand for irrigation systems in the domestic markets will remain high, driven by high crop prices and drought conditions, leading to prolonged spending in irrigation equipment through 2013. According to the U.S. Department of Agriculture, U.S. farm income will be a record $128.2 billion in 2013, up 14%.

This will be driven by high market prices and crop insurance payments that will offset losses from the drought. Prices for corn, wheat and soybeans are projected to remain historically high and above the pre-2007 levels. U.S. construction is finally stabilizing and is on the road to a much-awaited recovery. The American Institute of Architects forecasts a 5% increase in spending in 2013 for non-residential construction project and 7.2% for 2014. This in addition to the passage of the new Highway Bill through 2014 will benefit Lindsay’s infrastructural business.

Backlog increased 87% year over year to $159.3 million as of the second-quarter end, and 82% sequentially. The backlog includes strong domestic irrigation volume along with a $39.1 million contract in the Middle East consisting of irrigation machines and ancillary equipment that is expected to be shipped in the second half of fiscal 2013.

For fiscal 2012, approximately 36% of Lindsay’s consolidated revenues were generated from international sales. The ongoing instability in the U.S. and international markets along with the resulting global recessionary concerns and the slow economic recovery could adversely affect the ability of farmers and government agencies to buy and finance irrigation equipment and highway infrastructure equipment.

The drought in the U.S was a significant factor in driving sales in the first quarter. Even though the company expects 2013 results to benefit from prevailing weather condition in the U.S, this is not expected to contribute to similar year-over-year growth in the future.

Other Stocks to Consider

Lindsay Corporation currently retains a Zacks Rank #3 (Hold). Other stocks in the same industry with favorable Zacks ranks are Valmont Industries, Inc. (VMI) and CNH Global NV (CNH) which carry a Zacks Rank #1 (Strong Buy) while Alamo Group, Inc. (ALG) retains a Zacks Rank #2 (Buy).