Lindsay (LNN 0.74%) reported disappointing but not surprising first quarter results on Friday. The company is one of two major sellers of irrigation equipment in the United States, the other being Valmont (VMI 1.66%). A combination of increased rainfall and decreased crop prices caused a decline in irrigation sales and overall profits. On the bright side, management announced a plan to increase dividends annually -- starting by doubling the quarterly dividend beginning this quarter -- and to make strategic share repurchases.
The bad
Despite a very dry start to the year, the Midwest finally got the rain it needed to beat 2012's disastrous drought. According to the U.S. Drought Monitor, one year ago, 72% of the Midwest region was experiencing some kind of drought. Today, that number has fallen to just 33%, almost none of which is categorized as severe.
That's great news for farmers and food buyers, but not so great for Lindsay. Lindsay made large sales gains in 2012 when irrigation was the only game in town for watering crops, and had difficult comparisons this time around, despite sales that were still historically high.
The other problem is that crop prices have fallen as a result of increased yields. That leaves farmers in a tricky situation, as they may have more product to sell, but they have to sell it at a lower price. If you're worried about falling crop prices, and the rains have been good lately, you might just put off buying that fancy new center-pivot irrigator a bit longer.
One caveat to note, however, is that even though Lindsay's management has cited difficult comparisons and reduced demand, Valmont doesn't seem to buy into this narrative. The competing irrigator hasn't yet released its results for the quarter, but it did show great gains in its irrigation segment last quarter, "led by strong North American demand," while Lindsay's U.S. irrigation revenues fell last quarter. It remains to be seen whether Valmont will beat its competitor again in this recent quarter.
The good
While Lindsay's U.S. sales have been down, international sales have been very strong, to the tune of 32% this quarter. Globally, surface irrigation – essentially just dumping water on a field -- is by far the most dominant method, but it is also extremely inefficient. Lindsay's center-pivot systems are vastly superior and can increase crop yields significantly. They use an intricate trellis system hanging just above the plants, so that very little water is lost to wind or evaporation. They even employ satellite imagery and GPS guidance to ensure an even amount of water is applied to all of the crops. This method of irrigation ensures that about 90% of the water used makes it to the crops, versus about 50% for traditional methods. While they are still in low use even in America, the opportunity abroad is huge.
This is part of the reason management announced its capital allocation plan. With farmers worldwide needing to double crop yields by 2050 to keep up with rising population demands, efficient irrigation systems are one of the best investments they can make -- especially when another drought comes along. Despite lower sales this quarter, the company expects the long term to be very profitable, and it's putting its money where its press release is, by committing to reward shareholders with a rising dividend and buy back stock based on cyclical and seasonal fluctuations.
