Daniel Fotinich, Mercedeh Sabeti,
Nicholas Lee, Thania Amberiadis
Agenda
Industry Overview
Company Overview
Thesis
Drivers
Valuation
Industry
Acres Irrigated by Method (USDA)
•
•
Irrigation is the application of water to land to assist in the production of crops
 Traditional irrigation (gravity flow, flood irrigation)
 Mechanical irrigation (center pivot, lateral)
Industry Players
 Valmont and Lindsay (75% market share)
 T-L Irrigation and Reinke
Types of Mechanical Irrigation Systems
Center Pivot
• Center Anchor, spins in a circle
• Long life span,
automated, with low
maintenance and labor
costs
• Considered the best
irrigation system for a
majority of farms
Lateral Move
• Same as the Center pivot but
follows a square pattern
Micro-Irrigation
• Micro-Irrigation has a shorter
lifespan, is more labor intensive,
has higher maintenance costs,
but is more water efficient
• Has a close by water
source that releases
slowly
• Able to use waste water
• Directly above the plant,
can accommodate vine
agriculture better
Micro-Sprinkler
• Small sprinklers that spray water
Traveling Gun
• Irrigation system that uses a hose
with high water pressure to
distribute water
• Requires more energy
• Labor intensive
Center Pivot Irrigation
•
•
•
Self propelled system that rotates
around a central pivot point
Depth of water determined by
speed at which system moves
around field
More water applied the longer it
takes the system to complete a
transition
Benefits:
• Longer lifespan (20-25 years)
• Low labor & maintenance costs
• Used for rough terrain
• Utilize pesticides in the system itself
Company Overview
9500 P
• Leader in water management and
road infrastructure products and
services
• Irrigation System Segment
 Center Pivot
 Lateral Move
 Hose Reel
 Infrastructure Segment
 Moveable & Specialty Barriers
 Road Safety Equipment
 Railroad Structures
8500 P
7500 P
Business Model
Dealers
•
•
Farmers
Process
Lindsay manufactures their irrigation systems on a project basis and distributes them through an
extensive network of dealers
Dealers serve as a local point of contact and a holistic service, helping farmers pick customized
solutions and solve any issues they have with their products.
• Center Pivot itself is usually around 50% of the purchase
• Other 50% is irrigation infrastructure: Pumps, base, electricity, etc
Valmont Industries
Valmont is the original pioneer of the center pivot
irrigation system, under their banner Valley Irrigation
Sales
Other
10%
Irrigation
25%
Coatings
9%
Engineering
Infrastructure
27%
Utility
Support
Structures
29%
They are still the leading provider with a 43% market
share, but we believe that Lindsay will outperform
Valmont and is the top irrigation choice for three
reasons:
•
Lindsay has more readily innovated its center
pivot and has a stronger product, distributed
through its expansive dealer network
•
Lindsay has taken ~6% market share from
Valmont in the past decade
•
Lindsay is a pureplay on irrigation, while
Valmont’s business lines are largely diversified
•
Positive tailwinds in irrigation industry
will affect Lindsay more directly than
Valmont
International Opportunities
563 Million Irrigated Acres
•
8%
91%
Gravity Flow
Sprinkler
•
Other low-volume
Over 91% of the world’s
irrigated land is irrigated
through traditional
methods, and less than
4% is fully mechanized.
Lindsay has the most
widespread and reliable
dealer network of any of
its competitors.
Investment Thesis
International Irrigation Market Drivers
•
•
•
•
Weather Concerns
Shift from Dry Land Farming to Irrigated Farming
Population Growth & Government Subsidies
Emerging Market Growth
Lindsay Corporation
• Well-positioned in the irrigation industry to take
advantage of these trends
Weather Concerns
•
•
Projections show that drought is likely to continue in
the United States and many places abroad
When farmers fear drought, they’re more likely to
purchase irrigation systems
Dry Land v. Irrigated Farming
Dry Land Farming
• Arid areas without irrigation
• Drought resistant crops
• Soil protected from
evaporation
• Yield enhancement
opportunity
Irrigated Farming
• Application of water
• 17% of land is irrigated
• 40% of the world’s food
supply
• 46% of irrigation systems
sold by Lindsay
Government Involvement
•
•
In the US and Europe, farming is
heavily subsidized
– $45B/y in EU, $30B/y in US
As developing countries grow,
farmers’ wealth and farming
subsidies will increase to drive food
production higher
– Growing populations
Leads to more money available
to spend on efficient, long
lasting irrigation systems
Emerging Market Growth
GDP Per Capita % Growth
Per McKinsey
“By 2025, more than half of the world's
population will have joined the consuming
classes, driving annual consumption in
emerging markets to $30 trillion.”
Wealth increases will shift consumer eating demand from
agriculture to meat, requiring higher levels of output
Brazil
Brazil is the fastest growing
agricultural producer and is
expected to one of the
biggest, if not the biggest
producer in the coming years
There is significant room to increase irrigation penetration
• Area Available for Agriculture: 282 million hectares
• Area Cultivated: 65 million hectares
• Area Irrigated: 5 Million Hectares
World Trade Organization (2010)
•
•
Total spending in Agricultural and Livestock Plan is $38 billion
$2 billion is specifically allocated for the financing of agricultural
investments
Ukraine
Historically, % of agricultural land irrigated was flat at 5.26 % from 2006 – 2010
Since then, Ukraine has made serious moves to improve its agricultural sector
• Lots of conversion to irrigated land,
especially in southern areas starting in 2010
• Currently in the end stage talks for China to
loan $ 3 billion
• Will start in mid 2014
• Cover 1.3 million hectares
Corn Prices
• Expected and actual commodity
prices can influence farmers’
decisions to purchase extra
equipment
• These fears are largely short-term
and vary across regions
Net Farm Income ($B)
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
• This largely affects only their US
irrigation business
• Long-term, corn price fluctuations
shouldn’t dictate farmer demand
for modern irrigation
Variant Perception
The Street
• Corn prices will continue to
decline and affect their
irrigation business
• International markets can’t
grow as fast as they have
• Infrastructure segment is
lagging
BIG
• Much more irrigation
international growth
• Upside potential from
large projects
• Concerns over corn prices
are very short-term and USfocused
• Company valuation at 13
P/E does not factor in this
growth
Valuation
Fair Value
$89.45
Probability
Scenario
2015 Price
25%
Slight decline to flat growth in US Revenue
20-30% increase in international revenue
Slight infrastructure segment growth
10-12% Y/Y Revenue Growth
$96.23
50%
Slight decline to flat growth in US Revenue
20% increase in international revenue
Flat infrastructure segment growth
6-10% Y/Y Revenue Growth
$91.17
25%
Steep decline in US Revenue
11% increase in international revenue
Steep decline in infrastructure segment
-2%-2% Y/Y Revenue Growth
$79.21
Recommendation
Purchase 5% position at current stock price of
$77-$78 tomorrow morning
Q&A
Appendix
Valuation: Base Case
FY2012
FY2013
FY2014E
FY2015E
$551,255
$690,848
$732,940
$795,749
COGS
402,737
496,014
531,382
576,918
Gross Profit
148,518
194,834
201,559
218,831
Operating Expenses
83,008
87,773
93,157
101,140
Operating Income
65,510
107,061
108,402
117,691
Net Income
43,277
70,570
72,457
78,666
$3.38
$5.45
$5.60
$6.08
Revenues
EPS
Valuation: Upside Case
FY2012
FY2013
FY2014E
FY2015E
$551,255
$690,848
$759,542
$839,972
COGS
402,737
496,014
550,668
608,980
Gross Profit
148,518
194,834
208,874
230,992
Operating Expenses
83,008
87,773
96,538
106,760
Operating Income
65,510
107,061
112,336
124,232
Net Income
43,277
70,570
75,086
83,038
$3.38
$5.45
$5.80
$6.42
Revenues
EPS
Valuation: Downside Case
FY2012
$ 551,255
402,737
148,518
FY2013
$ 690,848
496,014
194,834
FY2014E
$ 679,773
492,836
186,938
FY2015E
$ 691,343
501,223
190,119
Operating Expenses
83,008
87,773
86,399
87,870
Operating Income
65,510
107,061
100,538
102,250
Net Income
43,277
70,570
67,201
68,344
Revenues
COGS
Gross Profit
EPS
$
3.38
$
5.45
$
5.19
$
5.28
Center Pivot
Before the invention of the center pivot, there were a number of inefficient irrigation
methods that required lots of input (water, labor, energy) and were not very versatile.
•
•
Design
• Span: pipe between two towers
• Towers: Support and wheels
• Outlets and Emitters/Droppers:
Release water
Advantages
• Water output precision
• Automated process that requires
little labor and maintenance
• Long Lifespan of 20-25 years
• Can emit pesticides
Infrastructure Segment
•
•
•
•
15% of Revenue
Closely linked to government spending
As emerging market countries increase
their wealth, there is greater focus on
developing infrastructure
Golden Gate Bridge Highway
– $14.1 million contract
– Moveable barrier procurement from
Lindsay as part of $26.5 million
bridge project
Russia
Historically, Russia has had very
low irrigation penetration,
especially after the disbandment of
the Soviet Union and deterioration
of previously state-owned capital
Production as of 2011 has still not
hit Soviet Union levels, and there is
significant opportunity here for
irrigation to increase yields
Corn Prices