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While the broader market has seesawed over the last few weeks, some stocks are soaring. One such stock is Lindsay (NYSE: LNN ) , which is up 10% since I recently singled it out as my top pick in agriculture machinery.
It seems part of Lindsay’s move was the result of an analyst upgrade at Janney Capital Markets, which isn’t exactly a fundamental reason for such a strong move in the stock price. But perhaps this stock deserves some closer analysis, and you can see if you agree with me and Ryan Connors at Janney.
Dry land is not a myth
Lindsay is primarily an irrigation company, which probably sounds about as boring as you can get. But irrigation has always been incredibly important to agriculture, and always will be. Plants will always need water (no technological disruption here!). The UN predicts that the global population will increase by about 2.5 billion by the year 2050, and some estimates suggest that the world will need to double crop growth by then to feed that many people. Farmers will be working against certain headwinds to accomplish that goal as well -- a recent study found that while rising levels of carbon dioxide in the atmosphere are acting as an ambient fertilizer for crops, the effect is more than offset by the heat and drought caused by global warming.
Even without global warming, heat waves and droughts are a fact of life, and can ruin large portions of a crop. The UN estimates that an area the size of all of the arable land in the Ukraine is lost every year due to drought, deforestation, and climate instability. Just as avoiding blunders is a quick way to greatly improve your chess game, using irrigation to mitigate the effects of drought and excessive heat is a better way of improving crop yields than trying to eke out better yields in good years. It’s no wonder that irrigation has been practiced for thousands of years, long before chemical giants like Monsanto (NYSE: MON ) and Syngenta (NYSE: SYT ) introduced genetically engineered seeds and advanced pesticides and herbicides.
The new industrial revolution
Still, one could argue that if irrigation has been around so long, and is practiced all around the world, where’s the opportunity for growth? Indeed, there are parts of the world where farmers use animal-powered tools, but they still have irrigation. The opportunity here would seem to be in favor of tractor and harvester manufacturers like Deere (NYSE: DE ) and AGCO (NYSE: AGCO ) , both of which have made significant investments to increase production in China and India, where tractor use is very low but irrigation is prevalent.
But a closer look reveals that the vast majority of the land uses surface irrigation -- basically the same method used by Egyptians relying on the Nile floods thousands of years ago. Surface irrigation is extremely inefficient because it is uncontrolled and basically involves flooding an area of land, which can damage the soil and over-water the crops.
Attack of the giant sprinklers
Lindsay, and its competitor Valmont (NYSE: VMI ) , market center-pivot irrigation systems. Center-pivot irrigation systems are basically very large, high-tech versions of the rotating sprinkler you might use on your lawn. They are designed to provide a very even amount of water to an entire field, and keep hydration levels relatively constant by speeding up or slowing down the rotation cycle (some can take days to make a full rotation).
These systems are more efficient than traditional flood irrigation, so less water needs to be used to achieve the same crop yields, a major plus in areas where water may be scarce. Lindsay’s driest reporting area is Europe, Africa, Australia, and the Middle East, which has seen sales grow by nearly 150% over the past five years, while sales in the U.S. have grown 62%.
The benefits aren’t limited to water efficiency, either. Center-pivot irrigated fields are more conveniently accessible for harvesting than flooded fields, and the technology in the systems allows for better field monitoring. These other benefits help to explain why Lindsay’s Mexico and Latin America reporting region, hugely important for global agriculture, has grown sales by over 300% in the last five years, despite having very good rainfall.
The Foolish bottom line
Lindsay may be trading at a somewhat lofty price, especially compared to the beating the rest of the market has been taking. But over the long term, Lindsay’s products will become increasingly important, and the company is well positioned to take advantage of global trends. As a long-term holding, this is still a great stock to own. But if you still want to wait for a better price, add Lindsay to My Watchlist so you can keep track of any developments.