Lindsay Corporation (LNN)
Irrigating the Emerging Markets with a Modest Valuation
We are long shares of Lindsay Corporation (NYSE:LNN), a global irrigation business headquartered inOmaha, Nebraska. Lindsay owns a world-renowned brand name (
), sells into an under-penetrated market and benefits from the secular trends of increasing global food scarcity and risingprotein consumption. Given this long-term growth opportunity, a robust capital efficiency profile (ROICof 25%+), and the stock trading at 13.7x net-cash P/E on trough FY 2014E earnings, we believe LNNshares trade at a 50% discount to our conservative estimate of intrinsic value.The mechanized irrigation business is a global duopoly, with Lindsay and Valmont Industries (VMI)
combining for about 75% of the global market share. During the 1970’s there were over thirty domestic
manufacturers of center pivot irrigation systems. But the mar
ket’s cycles eliminated most of the
competition and the past two decades saw Lindsay and Valmont emerge as the clear leaders.Mechanized irrigation systems improve crop yields, enhance water efficiency, and provide a higher return on investment for farmers than competing irrigation methods. Thanks to these benefits, marketpenetration of mechanized systems has increased from 35% to 46% in the U.S. over the past decade.
This has driven 15% annualized revenue growth in Lindsay irrigation’s business over the s
ame period.Over the next decade, we believe attention will shift to the international market, where just ~2% of irrigated fields employ mechanized systems. If market penetration reaches the level seen in the U.S.,
we believe Lindsay’s international oppo
rtunity exceeds $2.5bn in annual revenue, or about ten timeswhere its international business stands today.The bear case contends that lower corn prices in 2014 will depress farmer sentiment and cause year-over-year declines in pivot sales. But even if U.S. farmers temporarily defer purchases, in past cycles
Lindsay’s growth has historically returned after
just a few quarters. Furthermore, continued growth in
Lindsay’s international segment, which contributed 58% of irrigation revenue in FQ
4 2013, can work tooffset any short-term decline in U.S. farmer spending.Looking beyond the next few quarters
continued cash flow generation and projected returnto growth next year
will compress the stock’s already
cheap EV / EBITDA valuation to 6.0x in FY 2015and 4.7x in FY 2016.
Lindsay’s completely unlevered balance sheet, minimal capex requires, and
secular might also attract private equity interest. With the stock currently depressed because of the
market’s myopic focus on
quarterly results, we believe today is an opportune time to acquire shares.