We downgrade our recommendation on Lindsay Corporation ( LNN ) from Outperform to Neutral based on the volatility in agriculture commodity prices.
Recently, Lindsay reported excellent first-quarter 2012 results. Adjusted EPS of 60 cents per share were up 58% year over year, and outperformed the Zacks Consensus Estimate of 46 cents. Total revenue in the quarter increased 34% year over year to $119 million, and beat the Zacks Consensus Estimate of $102 million. The increase was primarily attributable to a 68% rise in total irrigation equipment revenues, driven by a 66% surge in domestic irrigation revenues and a 71% spike in international irrigation revenues.
Lindsay is optimistic about positive farmer sentiment. Moreover, the company's long-term drivers such as higher food production, water use efficiency and transportation safety products, and population growth are expected to hold course.
Lindsay will continue to focus on opportunities for growth both organically and through acquisitions. The company's recent business combinations include IRZ Consulting, LLC on August 26, 2011, WMC Technology Limited on November 3, 2010, Digitec Inc. on August 31, 2010 and Watertronics, LLC on January 24, 2008. These acquisitions reflect the execution of the company's strategy to grow its irrigation business with additional proprietary irrigation products. In addition, on August 28, 2009, the company completed the acquisition of certain assets of GE Transportation Systems Global Signaling, LLC. The company sees opportunities to create shareholder value through the acquisition of product line extensions that will enhance the company's highway safety product offering across the globe.
Lindsay also reduced its debt to $7.5 million as of November 30, 2011 from $11.8 million as of November 30, 2010, thereby improving the debt-to-capitalization ratio to 2.7% from 5% in the corresponding period.
However, the company nonetheless cautioned that, in fiscal 2012, the business will be subject to the volatility recently witnessed in agriculture commodity prices, besides government spending decisions in infrastructure.
During fiscal 2011, Lindsay experienced pricing volatility regarding purchases of certain commodities, in particular steel and zinc products, used in the production of its products. Though the cost outlook for commodities used in the production of the company's products is not certain, management believes that it can manage these inflationary pressures by introducing appropriate sales price adjustments and by actively pursuing internal cost reduction efforts, while further refining its inventory and raw materials risk management system. However, competitive market pressures may affect the company's ability to pass price adjustments to its customers.
The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.
Omaha, Nebraska-based Lindsay Corporation is a leading designer and manufacturer of self-propelled center pivot and lateral move irrigation systems, which are used principally in agriculture to increase or stabilize crop production while conserving water, energy and labor. The company also manufactures and markets road safety products. The company competes with Valmont Industries Inc. ( VMI ).