Buffett Isn't Omaha's Only Rainmaker

It might have been as long ago as the 1987 release of the film Wall Street, starring Michael Douglas as the ruthless but well-heeled financier Gordon Gekko, that the term "rainmaker" was unleashed. As you probably recognize, in financial parlance the word refers to one with the bucks and clout to make big things happen. On that basis, it's tough to conjure up anyone as worthy of the label these days as Warren Buffett, a.k.a. the Oracle of Omaha.

But during this waning summer, many of our nation's crop-growing areas have become so parched that, barring yet another hurricane, rain may soon become listed as an obsolete term in Mr. Webster's next dictionary. As such, attention in agricultural America has turned even more than usual to the companies that produce equipment capable of irrigating large segments of dried-out land -- artificial rainmakers, I suppose you might call them. Somewhat coincidentally, the two most prominent farming rainmaker manufacturers are both headquartered in Buffett's Omaha, Neb. They're Valmont Industries (NYSE: VMI  ) and Lindsay (NYSE: LNN  ) .

So very similar
The repertoires of both companies extend beyond irrigation equipment. But during a period when, for instance, corn costs have risen by at least 35% -- and still we insist upon pouring ethanol into our gas tanks -- and wheat is about half again above its recent price, it's the wide, skinny, almost spider-like irrigation systems that are getting much of the attention at both.

Valmont is the bigger of the pair, with a market capitalization slightly in excess of $3.5 billion, versus Lindsay's number just below $900 million. Part of the size differential stems from the fact that Valmont churns out a wider range of products than its smaller competitor does.

The company's product list includes the poles and structures that support streetlights and traffic-control elements, while the same unit also turns out structures that facilitate wireless communications. The utility support group manufactures both steel and pre-stressed concrete poles for high-voltage transmission lines, and its coatings segment provides a range of galvanizing, anodizing, and powder coating services.

Who'll start the rain?
Last, but clearly not least, is the irrigation segment, which in the past quarter accounted for about one-fourth of the company's total sales. Its output in this unit consists of center pivot and linear move mechanized irrigation equipment -- of the type you've undoubtedly noted in agricultural fields, where various types of crops were laboring to reach maturity -- along with related replacement parts.

The unit turned in $194.5 million of Valmont's nearly $1.5 billion in sales for the June quarter. The number for the period represented a 6% year-over-year increase and led to 17% growth year to date. Valmont noted at release time: "Farmers around the world seeking to improve productivity continue to invest in efficient irrigation equipment. ... Productivity is improved with mechanized irrigation equipments as yields increase while water use decreases compared with flood irrigation methods."

Like Valmont, Lindsay produces moveable barrier systems that assist in the reconstruction, resurfacing, and widening of highways, roads, and medians. It also produces crash cushions that serve to increase highway safety at freeway off-ramps, tollbooths, and the like. But in Lindsay's case, fully 87% of its revenues in the most recent quarter were contributed by its irrigation unit, which checked in with sales approaching $150 million for the quarter. Somewhat coincidentally, the half-century-old Lindsay also has seen its year-to-date revenues grow by 17%.

Strength at home
As was the case for a variety of industries during the most recent earnings season, North America carried the company, while much of the rest of the world languished. Specifically, domestic irrigation revenues increased by 38%, while international purchases in the segment slid by 12%.

From the perspective of general metrics, the two companies are remarkably similar. For example, Valmont's operating margin over the past 12 months was 11.50%, versus 11.60% for Lindsay. In part because of its net-debt-free balance sheet, however, Lindsay's return on equity is 14.23%, while Valmont's was a higher 23.17%. Further, Lindsay's five-year expected PEG ratio -- wherein less than 1.0 represents real strength -- is 0.81, to Valmont's 2.0. Finally, both companies offer 0.70% indicated forward annual dividend yields.

The Foolish bottom line
Rainfall levels notwithstanding, I become progressively more convinced that companies with an agricultural orientation merit progressively more investor attention. For that reason, not long ago I urged Fools to monitor the seed-production trio of Monsanto, DuPont, and Syngenta AG. For similar reasons, I urge Fools to add both Valmont Industries and Lindsay to My Watchlist today.

I believe this critical trend in agriculture will continue, and the smartest investors will understand the implications and boost their portfolio returns along the way. Likewise, there's another market trend that only the smartest investors are cashing in on, including the Oracle of Omaha. Buffett was one of the first to recognize deeply undervalued companies in this sector, as described in our recent special report, "The Stocks Only the Smartest Investors Are Buying." Get your copy for a limited time.

Fool contributor David Lee Smith doesn't own shares in any of the companies named in the article above. Motley Fool newsletter services have recommended creating a modified stock repair against synthetic long position in Monsanto. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


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