Wednesday, January 5, 2011

A Tale Of Two Companies

If Charles Dickens was alive and well in Omaha, instead of writing A Tale Of Two Cities, he may have tackled A Tale Of Two Companies. Omaha is home to two agricultural manufacturing companies that are both well run and in some business lines, direct competitors. Valmont Industries [VMI] and Lindsay Corporation [LNN] control the center pivot irrigation industry and also have significant operations in utility poles [VMI] and highway crash cushions [LNN]. Both are consistently profitable and financially sound; indications of sound management.

Valmont is the larger of the two and has numbers that are generally superior to LNN. VMI has a 10% operating margin to Lindsay's 9%, while producing a ROE of 11% vs LNN's 10%. Sales grew 20% last quarter at Valmont with the aid of an acquisition and only 4% at Lindsay. But the stock market views things differently.

Chart forValmont Industries, Inc. (VMI)
Lindsay has been the clear winner as far as the market is concerned. Consequently, you now pay 16 X cashflow, 3.4 X book value, and 24 X forward earnings. A buyer of Valmont only pays 10.7 X cashflow, 2.7 X book, and 18 X forward earnings. Valmont is not priced cheaply. Lindsay is just priced expensively.

I expect Lindsay will revert to Valmont's level of valuation and will continue to explore put option pricing and the availability of shares to borrow. In the long run i like both of these companies, but, at present, Lindsay is clearly over valued.

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