It's been a tough year for growth at Lindsay Manufacturing
The bulk of Lindsay's business is in the sale of irrigation systems that improve the flow and efficiency of energy and water used to keep crops growing. Lindsay's irrigation systems also have the ability to make previously unusable hilly terrain or sandy soil suitable for farming. But Lindsay's farming customers have been hit with higher energy costs -- haven't we all? -- as well as increased costs for fertilizer and other inputs. Crops are fetching lower prices this year as well. So despite the benefit that the farm industry may see from investing in new irrigation systems, the current environment makes it difficult to fund the investment.
Lindsay's income statement reflects this trying environment. Through the first nine months of the company's fiscal year, sales are down 9% and earnings per diluted share are down 47%, from $0.75 per share a year ago to $0.40 this year. However, within those numbers is the company's smaller Diversified Products sector, which sells steel tubing and offers outsourced manufacturing services. Business there is growing like a weed -- revenues are up 78% through the first nine months.
Looking away from the current year's income statement, though, shows the real story and a possible investment thesis. With a solid balance sheet full of cash and investments, approximately one-quarter of Lindsay's market capitalization is backed up in cash. And while the company's GAAP net income earnings are down, the company's free cash flow through the first nine months is up vs. last year and 23% higher than reported net income through the first nine months. The trailing 12 months of free cash flow result in an enterprise value-to-FCF ratio of 28, which is not dirt-cheap but at least puts things in perspective against the trailing P/E of approximately 50.
The long-term opportunity for a company that makes farming more efficient and poor farming land usable should be bright as the world's population increases. In the meantime, the company's Diversified Products business should help to smooth out some of the seasonality and the cyclical nature of the irrigation business. Plus, the company operates in an industry perceived as boring, which is something I always like. It certainly doesn't hurt that the company's management communicates openly about the state of the business and does a solid job of allocating capital to share repurchases and dividends.
For a closer look at Lindsay's Q3 numbers, click here.
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