Valmont Industries Inc.
/ (VMI-NYSE)We are reaffirming our Underperform recommendation on Valmont Industries following its lackluster fourth-quarter 2014 results.Revenues and profit for the quarter fell year over year on weakness across irrigation and utility businesses. Both revenues and adjusted earnings missed Zacks Consensus Estimates. The companyexpects difficult market conditions to persist in 2015. Valmont faces continued challenges in its irrigation business due to weak commodity pricing and large crop inventories. Moreover, its utility business is expected to be hurt by a difficult pricing environment.A soft Australian economy is also affecting the company’s coatings business.Valmont is also exposed to volatility in raw material costs and currency headwind.
/ Equity Research / VMI | Page 1
Current Recommendation / UNDERPERFORM
Prior Recommendation / Neutral
Date of Last Change / 10/08/2014
Current Price (03/10/15) / $120.91
Target Price / $110.00
SUMMARY
/ Equity Research / VMI | Page 1SUMMARY DATA
52-Week High / $161.1152-Week Low / $117.56
One-Year Return (%) / -17.10
Beta / 1.08
Average Daily Volume (sh) / 247,109
Shares Outstanding (mil) / 24
Market Capitalization ($mil) / $2,902
Short Interest Ratio (days) / 19.95
Institutional Ownership (%) / 96
Insider Ownership (%) / 3
Annual Cash Dividend / $1.50
Dividend Yield (%) / 1.24
5-Yr. Historical Growth Rates
Sales (%) / 15.6
Earnings Per Share (%) / 24.8
Dividend (%) / 20.0
P/E using TTM EPS / 14.8
P/E using 2015 Estimate / 16.3
P/E using 2016 Estimate / 14.8
Zacks Rank*: Short Term
1–3 months outlook / 5 - Strong Sell
* Definition / Disclosure on last page
Risk Level * / Below Avg.,
Type of Stock / Mid-Blend
Industry / Steel-Pipe&Tube
Zacks Industry Rank * / 255 out of 267
OVERVIEW
Headquartered in Omaha, Nebraska, Valmont Industries, Inc. (VMI) is primarily engaged in the production of fabricated metal products, metal and concrete pole and tower structures and mechanized irrigation systems in the U.S. and abroad. Customers and end-users of Valmont’s products include state and federal governments, contractors, utility and telecommunication companies, manufacturers of commercial lighting fixtures, large farms as well as the general manufacturing sector. The company operates through four segments:
Utility Support Structures:This segment manufactures engineered steel and concrete structures for the global utility industry. It also produces hybrid structures with a concrete base section and upper sections of steel.
Engineered Infrastructure Products:The division is engaged in manufacturing and marketing of engineered metal structures and components for lighting and traffic, wireless communication, roadway safety and access systems applications. It offers steel and aluminum poles and structures, which carry lighting and traffic control fixtures at outdoor lighting locations such as streets, highways, parking lots, sports stadiums, and commercial and residential development sites.
Irrigation: Under this segment, the company manufactures and distributes mechanical irrigation equipment and related service parts used to water crops and deliver soluble chemical fertilizers and pesticides.
Coatings: This segment provides metal coating services such as hot-dipped galvanizing, anodizing, and powder coating and e-coating (where paint is applied through an electrical charge).
In addition to these reportable segments, the company manufactures tubular products for industrial customers, forged steel grinding media for the mining industry and distributes industrial fasteners under the ‘Other’ category.
In 2014, the Engineered Infrastructure Products division accounted for roughly 35% of Valmont’s total revenues while Utility Support Structures, Irrigation and Coating segments represented 25%, 24%, 10%, respectively. The Other category contributed around 6% to total sales last year.
REASONS TO SELL
Valmont faces certain near-term challenges across a number of businesses. Within the company’s coating business, a weak Australian economy is hurting the profitability of its galvanizing businesses in the country.Weakness in the Australian mining industry is expected to affect results in the company’s coatings business. Moreover, results in Valmont’s North American irrigation business are expected to be hurt by lower commodity prices which will affect farm income. Lower farm income, in turn, is expected to impactequipment purchases by farmers. The division also remains affected by high inventories of key crops such as soy, soybeans and corn. The company is also seeing challenges in its North American utility structures business, partly due to project delays. Weak pricing is also affecting this business. Factoring in all these issues, the company expects its results in first-quarter 2015 to be significantly weaker than what was witnessed a year ago.
The sluggish European economy and the slowdown in China are affecting Valmont. Moreover, the company’s sales are sensitive to the market conditions in which it operates, which sometimes are highly cyclical and subject to significant downturns. For example, cyclical demand for its products offeredto the wireless communicationsmarket has led to fluctuating revenues from this business in the past.Sales of wireless communication structures and components remain weakin China. In the Engineered Infrastructure Products unit, weak government infrastructural funding is hurting lighting and traffic product markets across North America and Europe. Moreover, revenues from the company’s coatings business are highly linked with the level of construction activity, which is also cyclical.
Increased prices for key raw materials such as steel, aluminum and zinc, along with their reduced availability, may raise Valmont’s operating costs while reducing its profitability. The company may not fully recover increased raw material costs by raising the selling prices of its products, which may affect its profitability, especially in the Engineered Infrastructure Products and Utility Support Structures segments.
Valmont faces strong competition from a range of companies in each market it serves. Some its competitors have greater financial and technical resources or higher penetration in a market where the company operates. Valmont needs to consistently invest in product development, customer service and manufacturing to remain competitive.
Valmont is also exposed to currency headwind. A stronger U.S. dollar is expected to reduce its overseas revenues and hurt export profitability from the U.S. Unfavorable currency impact is expected to have a $0.30 per share earnings headwind in 2015.
RISKS
Valmont is seeing healthy momentum in its Engineered Infrastructure Products segment and should gain from higher infrastructure spending and acquisitions. It alsoremains committed to return value to its shareholders in the form of regular dividend payouts and share buybacks.
The company is poised to savor incremental opportunity in the utility market driven by the ongoing investment in North American transmission grid. Moreover, infrastructure build-outs by wireless carriers to support the roll out of 4G network are supporting the results of the company’s wireless communication structures business.
Valmont is actively pursuing capacity expansion through new constructions and extension of existing facilities to meet the increasing demand from utility customers in North America. Start-up of the second site in Tulsa, Oklahoma and ramp up of the new plant in Columbus, Nebraska is expected to place Valmont well for the next few years.
RECENT NEWS
Valmont Misses Earnings, Revenue Estimates in Q4–February 17, 2015
Valmont posted a profit of $40.5 million or $1.66 per share in the fourth quarter of 2014, down 26.3% from $54.9 million or $2.04 per share earned in the year-ago quarter. Fourth-quarter adjusted earnings (excluding non-recurring items) were $1.62, which missed the Zacks Consensus Estimate of $1.66.
For full-year 2014, Valmont posted a profit of $184 million or $7.09 per share compared with $278.5 million or $10.35 per share in 2013. Excluding one-time items, adjusted earnings for the year came in at $8.17 per share.
Valmontregistered revenues of $763.1 million in the quarter, down 7.8% from $827.9 million in the year-ago quarter. The decrease was mainly due to weaker conditions in the company’s irrigation and utility markets. Sales lagged the Zacks Consensus Estimate of $788 million.
Segment Highlights
Revenues from the Engineered Infrastructure Products division went up 16% year over year to $310.2 million. Sales were driven by revenue contribution from acquisitions made during last year. Sales of lighting and traffic products in North America increased due to increased activity in the U.S. commercial construction market, and the addition of revenues from the Shakespeare acquisition in Oct 2014.
Revenues from the Utility Support Structures segment declined 18% year over year to $216.1 million in the reported quarter as a result of a decline in North American markets. Sales also fell due to fewer large projects in the sales mix compared to last year.
Irrigation segment revenues decreased 21% year over year to $152.2 million in the quarter due to lower activity in North American markets. International results improved despite unfavorable currency impact. Crop prices and farmers income remained pressurized by record North American 2014 crop production and larger carryover stocks.
The Coatings segment’s sales declined 7% to $79.8 million year over year. The decline was due to lower volumes in Australia and reduced demand from Valmont's internal businesses.
Financials
Valmont exited the quarter with cash and cash equivalents of $371.6 million, down 39.5% from $613.7 million in the year-ago quarter. Long-term debt increased 62.8% year over year to $766.7 million.
Guidance
Looking ahead, Valmont expects difficult market environment to continue in 2015. The company expects the results of the Irrigation segment to be affected by lower commodity prices and large inventories of major crops such as corn and soybeans.
The markets for Valmont’s Engineered Infrastructure Products Segment are not expected to witness meaningful improvement in public spending on infrastructure both in the U.S. and overseas markets.
In the Utility Segment, the size of the market in North America should continue near current levels, and the pricing environment is expected to remain difficult.
The company expects the Coatings Segment to do well in its home market but face difficult markets internationally, especially in Australia.
Valmont Misses Q3 Earnings and Revenue Estimates–October23, 2014
Valmont posted a profit of $23.6 million or $0.92 per share in the third quarter of 2014, down 58.2% from $56.5 million or $2.10 per share earned in the year-ago quarter. Third-quarter adjusted earnings (excluding non-recurring items) were $1.92, which missed the Zacks Consensus Estimate of $2.16.
Valmont registered revenues of $765.7 million in the quarter, down 1.6% from $778 million in the year-ago quarter. The decrease was mainly due to lower sales in the Utility Support Structures segment, underutilization of productive capacities and weak pricing in a few markets, which led to a 59% decrease in the segment’s profits. Sales lagged the Zacks Consensus Estimate of $786 million.
Segment Highlights
Revenues from the Utility Support Structures segment declined 21% year over year to $181.2 million in the reported quarter as a result of a decline in North American volumes. The sales mix also included a larger portion of smaller projects that are exposed to price competition.
Irrigation segment revenues were unchanged year over year at $174.3 million in the quarter as modest declines in the North American markets were offset by gains in overseas markets. Sales declined in North America due to lower crop commodity prices. International demand increased owing to wide geographic coverage and higher investments in farm productivity.
Revenues from the Engineered Infrastructure Products division went up 13.3% year over year to $294.9 million. Sales were driven by the Valmont-SM which added $41.3 in revenues. Sales of lighting and traffic products in North America increased but were offset by modest reduction in sales of wireless communication products.
The Coatings segment’s sales declined 3% to $86.7 million year over year. The decline was due to the impact of weak mining activity in Australia.
Financials
Valmont exited the quarter with cash and cash equivalents of $452.2 million, down 16.8% from $543.4 million in the year-ago quarter. Long-term debt increased 63.1% year over year to $768.6 million.
Valmont completed refinancing of its long-term debt in the reported quarter by issuing $250 million of 5.0% senior notes due 2044 and $250 million of 5.25% senior notes due 2054.
Guidance
Looking ahead, Valmont expects the Utility Support Structures segment to generate improved sales and return to a double-digit operating income percent on a sequential basis in the fourth quarter.
In the Irrigation Segment, the company expects the selling season to begin later as the fall harvesting is still incomplete.
Valmont forecasts earnings for 2014 to be in the range of $8.55 to $8.65 per share including the impact of share buybacks and excluding $0.18 year-to-date fair value adjustments for Delta EMD and $0.91 year-to-date expenses for debt refinancing.
VALUATION
Valmont’s current trailing 12-month earnings multiple is 14.8X, compared to the 21.9X average for the peer group and 18.2X for the S&P 500. Over the last five years, the company’s shares have traded in a range of 12.7X to 25.5X trailing 12-month earnings. The stock is trading at a discount to the peer group, based on the estimated earnings for 2015.Our long-term Underperform recommendation indicates that it should perform below the broader market. Our price target of $110 is based on 14.8x our 2015 earnings estimate.
Key Indicators
Earnings Surprise and Estimate Revision History
DISCLOSURES & DEFINITIONS
The analysts contributing to this report do not hold any shares of VMI. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts’ personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts’ compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1129companies covered: Outperform- 15.5%, Neutral- 74.8%, Underperform – 8.9%. Data is as of midnight on the business day immediately prior to this publication.
Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company’s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock’s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively.
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