AGGRESSIVE GROWTH

Valmont Industries, Inc.

Ticker symbol: VMI (NYSE) Mid Cap Value Line financial strength rating: A Current yield: 1.1% Dividend raises, past 10 years: 7

Company Profile

Valmont Industries was founded in 1946 as a supplier of irrigation products and became one of the classic postwar industrial success stories, growing along with the need for increased farm output. It was an early pioneer of the center-pivot irrigation system, which enabled much of that growth and now dominates the high-yield agricultural business. These irrigation machines remain a mainstay of this most profitable product line, but the company has expanded on that core expertise in galvanized metal to make such familiar infrastructure items as light poles, cell phone towers and other utility structures, and those familiar high-tension electric towers that crisscross the landscape. As well, it provides such galvanizing services to other product manufacturers.

From the following product line summary, you’ll get a good idea how Valmont plays in important areas of infrastructure and agriculture:

• Engineered Support Structure products (35 percent of FY2018 revenues, 17 percent of operating income)—Lighting poles, including decorative lighting poles, guard rails, sign structures, towers, and other metal structures used in lighting, communications, roadway safety, wireless phone carriers, and other applications. Also includes products for the energy and mining industries including tubing and piping products, conveyance systems, grinding products, grates and screens for separation, windmill towers, and parts and products for human access like walkways and stair structures. Telecommunications towers are part of this business, and the shift to wireless and especially 5G networks will drive growth. Products are available as standard designs and engineered for custom applications as needed for industrial, commercial, and residential applications. If you’ve ever sat at a stoplight and wondered how a single cantilevered arm could support four 400-pound traffic signals, these are the folks to ask.
• Utility Support Structures (31 percent, 32 percent)—This segment produces the very large concrete and steel substations and electric transmission support towers used by electric utilities. This segment also includes offshore structures, once part of a separate Energy and Mining segment. We like this unit’s prospects as utility infrastructure is replaced and modernized in the interest of grid efficiency, and now, aesthetic and environmental sensibility—replacing traditional wood utility poles is part of this.
• Irrigation (23 percent, 35 percent)—Under the Valley brand name, Valmont produces a wide range of equipment, including gravity and drip products, as well as its center-pivot designs, which can service up to 500 acres from a single machine. Valmont also sells its irrigation controllers to other manufacturers.
• Coatings (10 percent, 16 percent)—Developed as an adjunct to its other metal products businesses, the coatings business now provides services such as galvanizing, electroplating, powder coating, and anodizing to industrial customers throughout the company’s operating areas.

The company is a market leader in a number of infrastructure segments including irrigation, power transmission poles, highway infrastructure, and certain coated products. In 2018 the company made several small but significant acquisitions, including Convert Italia, a provider of solar trackers; CSP, a New Zealand steel-coatings operation; Derit, a zinc galvanizer and manufacturer of steel lattice structures; Irrigation Components International, an irrigation supplier; Torrent, a high-pressure water and air components supplier; and Walpar, a manufacturer of overhead highway structures.

Financial Highlights, Fiscal Year 2018

Several headwinds in the form of increased material and transportation costs, soft global sales in utility structures and irrigation, tariff uncertainties, low farm incomes, and soft business in China led to a flat sales year in 2018; however, lower tax rates led to an 8 percent gain in net income. For 2019 and especially 2020, the company looks to improved business especially in transportation and telecommunications structures (5G especially) and electric grid replacement to drive stronger revenues: 5–7 percent higher in 2019 and 2–3 percent 2020 with earnings up 5–7 percent in both years. The company has stated long-term goals of 5–10 percent revenue growth and per-share earnings growth exceeding 10 percent. Modest buybacks will reduce the already-low share count (22 million shares) while the dividend may remain unchanged for the next couple of years as the company pays down long-term debt.

Reasons to Buy

We remain attracted to—and loyal to—the fundamental strengths of Valmont and its core businesses, and in particular their niche strength and strategic importance to the interests of agriculture, water conservation, and infrastructure.

As much as anything we continue to view Valmont as a key infrastructure play. America’s infrastructure needs to be replaced and much of it upgraded, as does infrastructure in much of the developed world. As for the less-developed world, that infrastructure needs to be built in the first place. We think, long term, that Valmont is in the right place to capture a decent share of this replacement business, including electric utility infrastructure—which in particular may be moving away from the traditional wooden telephone pole (as it has in most of the rest of the world) and as more aesthetic high-tension power poles come into favor. Wireless networking infrastructure will become a more important part of this business. The original irrigation business should also do well in the long term as global food consumption increases and as agriculture, farmland, and farm commodity prices eventually strengthen—and as droughts in key “ag” markets persist. The company’s continued emphasis on growth into new geographies should pay dividends as India and China build more infrastructure and adopt more modern agricultural methods. We also like the relatively simple, straightforward nature of this business and the way the company presents itself online and in shareholder documents.

Reasons for Caution

Of course, the infrastructure “boom” may be drawn out over time as capital investment and government funding address other priorities. The relatively small size and deep, large-scale manufacturing infrastructure of a company like Valmont makes it more vulnerable to cyclical weakness—although steadier public sector demand mitigates that somewhat. Raw materials costs and tariffs have gotten in the way but may become less of a factor. Valmont presents plenty of long-term opportunity in our view, but that doesn’t come without some risk.

SECTOR: Industrials Beta coefficient: 1.05 10-year compound earnings per-share growth: 7.0% 10-year compound dividends per-share growth: 13.5%

		2011	2012	2013	2014	2015	2016	2017	2018
Revenues (mil)		2,661	3,029	3,304	3,123	2,619	2,523	2,746	2,757
Net income (mil)		158.0	234.1	278.5	184.0	40.0	173.2	158.2	170.4
Earnings per share		5.97	8.75	10.35	7.09	1.71	7.63	6.95	7.59
Cash flow per share		8.80	11.40	13.27	11.39	5.74	11.35	10.71	11.54
Dividends per share		0.72	0.88	0.98	1.38	1.50	1.50	1.50	1.50
Price:	high	116.0	141.2	164.9	163.2	129.1	156.0	176.4	171.5
	low	73.0	90.2	129.0	116.7	92.3	96.5	136.0	103.0

Website: www.valmont.com