Two hot sectors of the global economy that are still doing well are infrastructure and agriculture spending. The strength in the infrastructure market is being driven by investments in electric grid upgrades and continued demand for renewable power and clean energy solutions, along with cellular network upgrades. The agriculture markets have been strong due to higher commodity prices as a result of supply and demand imbalances around the world.
Companies that are involved in both have been putting up strong results. One of those is Valmont Industries Inc. (VMI, Financial), which provides engineered products and services for infrastructure development and irrigation equipment and services for agriculture.
The company operates through two segments. The infrastructure segment produces engineered access systems, highway safety products and integrated structure solutions for smart cities. This segment also includes steel and concrete pole structures for global utility transmission, distribution and generation platforms. Another offering is coatings, which provide global galvanizing, painting and anodizing services.
The agriculture segment mechanizes irrigation systems and provides water management solutions for farms. The company also has a developing solar-related business.
Addressable market
The long-term need for investment in critical infrastructure globally continues to be supported by government stimulus. Within utility markets, there is ongoing demand for renewables, grid hardening and expanding environmental, social and governance factors. The transportation sector is showing needs for advanced lighting systems and long bridge improvements. The galvanizing business is expanding as growing number of economies will need to extend the life of steel products globally. The rapid expansion of 5G network deployment also provides opportunities for the company.
The agriculture market is showing favorable market conditions, including high commodity prices and positive farmer sentiment, which is leading to increased demand for irrigation equipment and farm technology solutions. Food security with a growing population and continued geopolitical conflicts are driving international governments’ investment in agriculture. There is also an increased demand for advanced technology adoption, which is being led by growers' increasing demand for connected crop management and advanced analytics. These technologies reduce input costs, increase land productivity and minimize farm labor costs.
Financial review
For the third quarter of 2022, the company put up some of the strongest results in corporate America.
During the three months ended Sept. 24, sales increased 26.3% to $1.1 billion, driven by a 23% increase in the infrastructure segment and a 36% increase in the agriculture segment. Adjusted operating income increased 41.9% to $114.1 million, compared to $80.4 million in the prior-year period. Adjusted earnings per share increased 35.8% to $3.49 from $2.57 in the year-ago quarter. This was the eighth consecutive quarter of double-digit sales growth.
The company maintains a strong balance sheet with $166 million in cash and $935 million in long-term debt. Based on trailing Ebitda, the leverage ratio is approximately 1.5. The company has $595 million available on its revolving line of credit.
Valmont maintains a balanced capital allocation strategy. For the first nine months of 2022, the company spent $67 million in capital expenditures, $39 million in acquisitions, $20 million in share repurchases and $34 million in dividends. The company indicated it has a record global backlog of $2 billion, reflecting strong market demand around the world.
Valuation
The company’s most recent guidance calls for a 22% increase in sales to $4.3 billion, adjusted earnings per share in the range of $13.65 to $14 and approximately $100 million in capital expenditure. Consensus analyst earnings per share estimates are $13.81 for 2022 and $15.48 for 2023. That puts the stock selling at 24 times this year's earnings. The current enterprise value/Ebitda ratio is approximately 14.
The GuruFocus discounted cash flow calculator creates a value of approximately $245 when using $13.81 and a generous long-term growth rate of 10%. The company is considered somewhat cyclical and earnings can often be lumpy.
The company pays an annualized dividend of $2.20, which equates to only a 0.66% dividend yield because of the high stock price. However, the payout ratio is low at 0.16 and the company has a target payout ratio of 0.22, which implies dividend increases are forthcoming.
Guru trades
Gurus who have purchased Valmont stock or added to their positions recently include Joel Greenblatt (Trades, Portfolio), Jeremy Grantham (Trades, Portfolio) and Jim Simons (Trades, Portfolio)' Renaissance Technologies. On the sell side, Chuck Royce (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) reduced their holdings during the third quarter.
Summary
It is possible that Valmont is close to peak earnings. The tailwinds may turn to headwinds if commodity prices retreat in a meaningful manner and government budgets get stretched and cannot continue with infrastructure stimulus programs.
Buying a cyclical stock like Valmont when trading near all-time highs is generally not a good idea for long-term investors. The stock may squeak out a few more gains from here, but the highest returns are usually realized after buying the stock in a recession or in troubled times. During the 2008 financial crisis and recession, Valmont's stock traded near $40 per share. Investors who had the fortitude to buy at those levels realized significant gains.
Those gains will not be repeated for investors who buy the stock currently.
