For life to exist, there is no denying that water is one of the most vital resources. With a world population larger than ever and concerns over the real threat from climate change, ensuring that we have a functional and healthy relationship with water, as a society, is of the utmost importance. One company dedicated to making it happen is Lindsay Corporation (NYSE: LNN). The company provides a wide range of products and services aimed at helping customers achieve their water-oriented needs. Apart from that, the company also provides various other products that are included in the infrastructure market which helps to diversify its revenue streams so that investors have an additional level of stability. In recent years, the company’s financial performance has been unstable; this is especially true in the top row. But cash flow is good and getting better. However, at the same time, business stocks do look a bit expensive. At best, the company is most likely fairly valued. But it’s possible that the stock is a bit too expensive at the moment.
Small but diverse prospects
As I already mentioned, Lindsay is dedicated to providing a wide range of goods and services dedicated to the water space. The company does this through the Irrigation segment. The unit focuses on manufacturing and marketing center pivot irrigation systems, lateral movement, and hose reels mostly used in the agricultural industry for the purpose of increasing or stabilizing crop production while saving water, energy and labour. For context, the center shaft is a makeshift device that extracts water using a pumping system, transports it through pipes, and then sprays it via sprinklers onto crops as the device itself is moved, using an electric motor, across agricultural fields. This helps drastically reduce the time, energy and money associated with ensuring that the plants are watered properly. In addition, the company provides other items, such as repair and replacement of spare parts for irrigation systems, as well as controls. In recent years, management has moved the company towards IIoT (Industrial Internet of Things), integrating various technologies into its irrigation products. During the company’s 2021 fiscal year, this segment was responsible for 83% of the company’s revenue but 75.8% of modest profits.
The second and much smaller segment operated by Lindsay is called Infrastructure. Through this, the company manufactures moving barriers, special barriers, collision bearings, end terminals, road markings and road safety equipment, large diameter steel pipes, and railway signals and related structures. These products aid in the safe construction and manufacture of roads, railroads, and other highways. Under the road marking and road safety equipment category, the company’s offerings include preformed tape and road safety accessory products. Preformed tape is used primarily in temporary applications such as marking for work zones and road crossings. Under the road safety accessory product category, the company manufactures plastic and rubber products used for delineation, traffic slowing and signaling. Last year, this unit was responsible for only 17% of the company’s revenue but was responsible for an impressive 24.2% of profits.
Over the past few years, Lindsay’s financial picture has been a bit volatile. After seeing revenue increase from $518 million in 2017 to $547.7 million in 2018, it fell to $444.1 million in 2019. Sales recovered some in 2020 before surging to $567.6 million last year. This increase in revenue occurred even when the Infrastructure segment experienced a 23% decline in revenue from year to year. The Irrigation segment more than made up for this, up 35% from 2020 to 2021. The company attributes most of the decline associated with its Infrastructure segment to the delivery, in 2020, of a major UK project that managed not to repeat this past year. Meanwhile, revenue in the Irrigation segment increased mainly as a result of increased sales volume of irrigation equipment units and higher average selling prices. This is true in both North America and the International region tracked by the company.
Just like revenue, profitability for the company also fluctuates slightly. Net income fell from $23.2 million in 2017 to $2.2 million in 2019. Then, in 2020, it jumped to $38.6 million before rising further to $42.6 million last year. Of course, there are other profitability metrics for us to consider. Interestingly, operating cash flow followed a similar trajectory, dropping between 2017 and 2019 before rebounding in 2020. In 2021, however, it fell slightly, down from $46 million to $44 million. However, if we adjust for changes in working capital, the metric will generally improve over time. Despite a major drop in 2019 to just $18.3 million, the overall adjusted operating cash flow trajectory has been consistently positive, with the metric ultimately rising from $42.6 million in 2017 to $67.9 million last year. Meanwhile, EBITDA followed a similar trend to operating cash flow, dropping between 2017 and 2019 before recovering in 2020 and then dropping in 2021.
For fiscal year 2022, the company’s financial performance is generally positive. Revenue in the first half of the year was $366.3 million. That’s up 45.3% compared to $252.1 million made one year earlier. Infrastructure revenues continued to fall, down 14% year-on-year. However, the Irrigation segment experienced a 59% increase in revenue as a result of increased sales volume of irrigation equipment units and higher average selling prices. Management said that the increased demand for equipment has been supported by higher agricultural commodity prices and higher farmer incomes. Meanwhile, the higher average selling price occurred as a result of the higher raw material costs that the company was able to bear to its customers.
On the profitability side of the equation, the results are also mostly positive. Net profit in the first half was $22.5 million. That’s up from the $19 million reported just one year earlier. Operating cash flow did deteriorate, dropping from $11.1 million to negative $35.9 million. But if we adjust for changes in working capital, it will increase from $34.4 million to $38.7 million. Meanwhile, EBITDA also increased, rising from $33.2 million to $41.7 million. Management has not provided concrete direction for the current fiscal year. But if we analyze the results experienced so far this year, we should anticipate a net profit of $50.4 million, adjusted operating cash flow of $76.4 million, and EBITDA of $91.6 million.
While this would represent a nice improvement over what the company achieved last year, it doesn’t necessarily mean that the stock makes sense to buy. Using this 2022 forecast, we can calculate that the firm is trading at a price-to-earnings multiple of 26. The price for the adjusted operating cash flow multiple should be 17.1, while the EV to EBITDA multiple should be around 14.5. At best, it looks quite valuable to me. However, if financial performance finally returns to the way it was in previous years, the company could look a bit expensive. Using the numbers 2021, for example, these multiples would be 30.8, 19.3, and 18.3, respectively. And if we look at the financial performance dropping back to 2018 levels, the multiples are 64.5, 29.1 and 24 respectively. To put this in perspective, I decided to compare the company with five similar companies. On a price-to-earnings basis, these companies range from a low of 9.1 to a high of 22.5. Compared to our 2021 results, all five companies are cheaper than Lindsay. The same is true when using the EV to EBITDA approach, which results in a range of 7.5 to 15.4. Firms only look relatively cheap when looking at prices for multiple operating cash flows. Competitors are in the range between 6 and 135, with only one in five cheaper than our prospects.
|Company||Price / Earnings||Price / Operating Cash Flow||EV / EBITDA|
|Titan International (TWI)||18.4||135.0||10.3|
|Toro Company (TTC)||22.5||28.8||15.2|
|CNH Industrial NV (CNHI)||10.3||6.0||11.0|
|Deere & Co. (DE)||16.8||24.0||15.4|
Based on the data provided, I like the business model used by Lindsay. The company is likely to continue to grow in the long term and will create added value for its investors over time. Having said that, I don’t think stocks are a big investment right now. Considering the broader economic outlook, it is possible that a slowdown or recession could depress prices and demand for its products. But even if that wasn’t the case, the stock doesn’t look any better than its current fair value. So in the best case, investors buy a company that is considered fair, while in the worst case they get something that will become too expensive before too long. Having said that, I decided to rate this business as a soft ‘sale’ at this point.