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.

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.