Nature's Way

Things come and go. If they occur at the right time, for the right reason, there isn't a problem. Gazing out the window, thousands of gulls are still sitting in the lake, but soon they will move on. The pelicans arrived a few days ago and some have already headed South. Some migrating geese are joining the local guys and too will head off. This phenomenon occurs in humans also.

A division president of Jones Lang LaSalle quit to become CEO of HCP healthcare. JLL is a $4B marketcap company and HCP is an $18B outfit. CEO is better than division president. She was already a HCP board member so her decision was not made in a vacuum. Why wouldn't a manager take a more important position with a larger company, likely for more money? It's the natural thing to do.

Unfortunately, Wall Street also reacts naturally which means stupidly. Today they've taken about $4.00 off JLL's price presumably because of the executive departure. That 4% hit is about 3% more than the market's "government shutdown " impact. While headline panic seems to be the market's natural course, the reaction of a rational investor should be to buy and obtain a 3% headstart. I've been doing so today.

I can't think of another animal analogy, but another favorite of mine, Valmont Industries, has been taken out and paddled lately. It's gone from $130ish to $150ish and now back to $130ish. Ouch. Not for any good reasons that I can determine. So more cash goes from the sidelines into VMI and I hope it will help me go South this Winter.

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.

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.

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.

All We'll Hear In 2010 Is Jobs, Jobs, Jobs

Soon the Democrats will have their healthcare victory. It may be a hollow victory that barely resembles their initial goals, but it will be declared momentous and beneficial to all Americans. We will have more laws and taxes for the sake of illusive healthcare improvements. Any consequences of the legislation, such as debt, increased taxation and job losses, will be several years away, so the celebration can begin.

With some sort of a healthcare victory behind Obama and the Democrats, they can turn their attention to what Americans are really concerned about. That is the economy and job creation. The party in power has been slow to realize that healthcare reform is not the voters number one priority. In 2010 the Democrats will innundate us with job creation legislation.

Just like healthcare costs and coverage, job creation can either be nurtured simply and effectively, or politicians can talk big, tinker, and accomplish little. Rest assured, Obama will get a jobs bill and victory will be declared. No, he won't accomplish an improvement in employment by simply lowering corporate income taxes or the highest personal, marginal rates paid by business owners of Sub Ss or LLCs. That would never happen as it would make sense. Jobs legislation will need to be targeted so social goals and constituencies can be served. Power must be preserved. The mid-term elections must maintain the Democratic majority and 10+ percent unemployment will not accomplish that. So, let the jobs tinkering begin.

What private sector growth can Democrats tolerate? The list is short: green jobs in sustainable energy, unionized workforces in manufacturing, the entertainment industry, design and construction of government building projects, data processing that consolidates and improves medical recordkeeping, and agriculture. These constituencies are apt to receive extra assistance.

We will see a general investment tax credit for the purchase of capital goods or additional employment. Capital goods purchases and employment growth in targeted industries will see an expanded tax incentive. Wind and solar projects, energy efficient appliances and transportation, almost any item manufactured and exported by a union member, will attain special status in the name of job creation. Rebuilding the construction industry with unionized labor by funding more school and transportation projects. None of this will be called stimulus as that has become synonymous with wasteful spending. In 2010 we will have job creation. Democrats will attempt to sound like Republicans.

Capital goods manufacturers that export will see an ITC driven sales boom on top of the weak dollar benefit.The likes of Cat, Deere,Trinity and Valmont, among others, will see revenue growth. Even in a "U" recovery some stocks will appreciate and select American manufacturing companies may benefit from Obama's next victory. Forget about the additional debt and taxation that will accompany, like healthcare reform, the job creation "success"as it won't cause credit and inflationary problems for several years. It will be a "victory" or the Republicans will get a chance to get change correct.

Back to stocks, Deere, while certainly not cheaply priced, is an unionized exporter that serves the agriculture and construction industries and might be a place to park a few dollars while Obama creates jobs,jobs,jobs.