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Sell Lindsay (LNN)
04/08/2011 12:52 pm EST
On March 30 the company blew away projections for the second quarter of fiscal 2011 with earnings of 89 cents a share. That was up from 48 cents in the second quarter of fiscal 2010 and above analyst projections for 71 cents a share fore the quarter.
Revenue grew by 41% to $120 million in the quarter.
Revenue from irrigation systems grew a strong 35% from the second quarter of fiscal 2010. Revenue from the United States grew by 72% although international irrigation revenue slipped 14%.
But the big driver for the quarter’s earnings beat was the company’s infrastructure segment. Sales of such products as the Quickchange Movable Barrier, used in highway construction, climbed 65% from the second quarter of fiscal 2010. Gross margins at Lindsay climbed to 28.3% from 26% a year ago thanks to sales of higher margin infrastructure products.
It’s the uncertain prospects for that infrastructure business that leads me to recommend selling these shares. I think irrigation revenues are likely to continue to grow strongly in the year ahead as higher commodity prices give farmers more cash to invest in things such as tractors and irrigation systems. But the outlook for the company’s infrastructure segment is extremely uncertain given budget cuts at the state level in the United States and the winding down of any remaining stimulus at the federal level. (Not to speak of any potential cuts to infrastructure spending that result from the negotiations between House Republicans and Senate Democrats.)
If you remember, I recommended buying these shares after a quarter when disappointing infrastructure revenue knocked them down in price. I’d recommend selling these shares now and looking for a replay of that trade.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Lindsay as of the end of January. For a full list of the stocks in the fund as of the end of January see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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