Kerrisdale Capital Goes Long Lindsay CorpVW Staff
We are long shares of Lindsay Corporation (NYSE:LNN), a global irrigation business headquartered in Omaha, Nebraska. Lindsay owns a world-renowned brand name (Zimmatic), sells into an under-penetrated market and benefits from the secular trends of increasing global food scarcity and rising protein consumption. Given this long-term growth opportunity, a robust capital efficiency profile (ROIC of 25%+), and the stock trading at 13.7x net-cash P/E on trough FY 2014E earnings, we believe Lindsay shares are more than 50% undervalued.
Linday Corp and Valmont Industries’ market share
The mechanized irrigation business is a global duopoly, with Lindsay Corporation (NYSE:LNN) and Valmont Industries, Inc. (NYSE: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 market’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, market penetration 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 same 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 Corporation (NYSE:LNN)’s international opportunity exceeds $2.5bn in annual revenue, or about ten times where its international business stands today.
Lindsay Corp’s growth
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 Corporation (NYSE:LNN)’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 FQ4 2013, can work to offset any short-term decline in U.S. farmer spending.
Looking beyond the next few quarters, Lindsay Corporation (NYSE:LNN)’s continued cash flow generation and projected return to growth next year will compress the stock’s already cheap EV / EBITDA valuation to 6.0x in FY 2015 and 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.