Take Your Profits and Run from Lindsay

04/08/2011 3:15 pm EST


Jim Jubak

Founder and Editor, JubakPicks.com

I'd like to take profits in Lindsay (LNN), now that the stock is again above my $72 target price.

So, as of today (April 8), I’m selling these shares out of Jubak’s Picks for a 19.8% gain since I added Lindsay to the portfolio on December 23, 2010.

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 analysts' projections of 71 cents a share.

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 this quarter’s earnings surprise 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 these higher-margin infrastructure products. However, it is precisely 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 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 mention any potential cuts to infrastructure spending that result from negotiations between House Republicans and Senate Democrats.)

If you remember, I recommended buying Lindsay after a quarter in which disappointing infrastructure revenue knocked their shares down.

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 column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. 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 here.

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