Thursday, March 4, 2010

Valmont's Rise Is Overdone

February 17, 2010 seems lightyears away. On that day Valmont Industries [ VMI ] reported earnings and offered 2010 guidance. The good news was that net income grew 5% on expense control success. The bad news was that revenue declined 19% due to weakness in the utility and construction business. The company sees a 25% decline in net income for 2010! VMI stock fell several dollars to about $69.

Today, Valmont announced the acquisition of Delta, PLC, a similiar company in the galvanization business and manufacturer of utility poles and highway products. Delta is strong in Asia and Australia. The price is $430 million, including $350 million of Delta debt. The debt component elicited a warning from S & P that the company could be downgraded should deal terms or market conditions change negatively. VMI sees the transaction as accretive to earnings in 2011. The stock was up $8.12, 11%, to $81.63.

VMI is up $13 in 14 days. The company's recent guidance for 2010 has dropped concensus earnings to $4.26 resulting in a forward P/E of 19. A 19 multiple is fairly stout for a company with declining sales, a 25 % decrease in net income, and the likelihood of higher interest rates, thus lower P/Es.

Valmont is a solid company. It has generally earned a good ROE and hasn't over leveraged itself. It builds quality products and is a leader in each of its businesses. International business provides access to the faster growth of emerging markets. VMI is a company that is hard to bet against, but I think I will.

At 19 times 2010 earnings there isn't a lot of logical share price growth ahead. Poor earnings comparisons and potential merger integration issues, as well as the specter of a S & P downgrade, could cause pressure on the shares.

I haven't pulled the trigger yet, but I'm seriously thinking about selling shares short.


William F. Kabourek said...

I think I'll continue to wait. If my thinking is valid VMI will have further to fall and lessen my risk.

Carol 4 u said...
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