Buy irrigation equipment maker Lindsay on the drip (I mean dip)

04/02/2013 5:00 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

And speaking of infrastructure. (See my post from this morning http://jubakpicks.com/2013/04/02/ive-been-walking-on-the-railroad-and-thinking-about-investing-in-infrastructure/)

I’ve held off on buying shares of irrigation equipment (almost) pure play Lindsay (LNN) because of worries about the continued drop in revenue at the company’s unit that sells traffic and construction barriers.

Certainly there were no signs of a turnaround for that business in the results of the fiscal second quarter that the company reported on March 27. Infrastructure revenue was down 15% from the fiscal quarter a year ago. In its outlook for the rest of calendar 2013 the company called the infrastructure business “challenging.”

But infrastructure is a diminishing part of Lindsay’s business—revenue from that unit in the quarter came to $12.9 million versus $162 million for the irrigation business—and the 22 states that have passed measures in the last year to raise more money for highway spending do argue for a bottom sometime in 2013.

The stock has sold off heavily since March 26. Most of that, though, hasn’t been disappointment with Lindsay’s results—revenue from irrigation equipment climbed 39% in the quarter a year earlier (and operating margins climbed to 16.8% in the quarter from 14.3% in the year-earlier quarter.)

Instead the problem has been a report last week from the U.S. Department of Agriculture that said corn stockpiles would be above analyst estimates at the maximum drawn down before this year’s harvest. That produced a 5% drop in corn futures on Thursday of last week and a 6% drop on Monday. Prices of agricultural stocks such as Deere (DE), Potash of Saskatchewan (POT), Monsanto (MON), and Lindsay have followed corn futures downward.

I’m going to use this sell off—which seems overdone since while stockpiles may be above estimates, the U.S. Department of Agriculture is also predicting a record or near record number of acres will be planted to corn—and what I think is the likely stabilization of the infrastructure business to buy shares of Lindsay. I think irrigation is a profitable long-term play on increased global demand for food, on decreased global supplies of water (and certainly of water in the right places), and of increased volatility in global weather. And there just aren’t very many pure plays (or almost pure plays) on water.

I’d set a six-month target price for the shares of $96. (Thanks to those readers who asked about Lindsay after my earlier infrastructure post.)

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/, I liquidated all my individual stock holdings and put the money into the fund. The fund may or may not now own positions in any stock mentioned in this post. The fund did not own shares of Lindsay as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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