Valmont Industries: Continued Strength

In November of last year, I concluded that Valmont Industries, Inc. (NYSE:VMI) was made of steel. The company has seen a very strong operating performance after years of relative stagnation, as this fueled momentum in the shares as well. With shares outperforming actual earnings growth, I believed that multiples were expanding (too much), with no imminent appeal seen.

Establishing A Base Case

Valmont is active in the production of fabricated metal products such as traffic signals, parking lot lighting poles, towers, irrigation equipment, etc. Typical industries in which these products are used include industrial production, transportation and agriculture, among others.

Valmont was a $3.5 billion business in 2021 and reports sales across four segments. The largest were a $1.1 billion utility support structure business and a $1.1 billion engineered support structures business, a $1.0 billion irrigation segment, and a $0.4 billion coating business. The company generated adjusted earnings close to $11 per share in 2021 as shares traded largely around the $250 mark that year. This resulted in a demanding multiple, with net debt of $770 million being equal to nearly 2 times EBITDA at the time.

That said, the company outlined a solid guidance for 2022 with sales seen up to $3.8-$4.0 billion (in part aided by inflationary trends) with earnings for the year initially seen between $12.25 and $13.00 per share. This earnings guidance was hiked with each of the quarterly earnings reports during 2022 to nearly $14 per share, reducing the earnings multiple to 23 times when I looked at shares in November, when shares traded around the $325 mark.

With 21.5 million shares representing a $7.0 billion equity valuation, the business was valued at $7.8 billion including the assumption of net debt. While I was appreciative of the operating momentum seen in 2022, I was fearful to apply an above-average earnings multiple based on earnings which are coming in above average, which led me to conclude to potentially get involved in a $200-$250 range.

Coming Down

Amidst concerns on the valuation and economic uncertainty, shares of Valmont have come down a bit to a low around $260 in May of this year, with shares having rebounded to $288 at the moment of writing.

In February, the company reported strong 2022 results, a year in which revenues rose 24% to $4.35 billion as operating earnings rose to $433 million, for margins near 10%. The company posted GAAP earnings of $251 million, or $11.62 per share on a diluted basis, with adjusted earnings reported at $13.82 per share. This latter number mostly excludes a $1.54 per share charge related to the divestment of the offshore wind energy business, and some smaller adjustments. Net debt of $685 million was very modest, with EBITDA reported in excess of half a billion.

The 2023 outlook was convincing with sales seen up 4-7%, even accounting for the divestment of the offshore wind energy business, with adjusted earnings seen up to $15.35-$15.90 per share.

With leverage down a bit and shares being stagnant, Valmont announced a $400 million share buyback program in February, while increasing the dividend to a relatively modest annual payout of $2.40 per share.

In April, Valmont reported first quarter sales being up 8% to $1.06 billion with margins improving to 11% of sales, allowing for adjusted earnings per share to rise by 17% to $3.61 per share. This meant that the company hiked the adjusted earnings range by ten cents, as net debt ticked up to $812 million, mostly due to some aggressive buybacks in the first quarter, although that leverage remains very modest, certainly as EBITDA is creeping up to $600 million per annum here.

On top of the share buybacks, the company ignited some actual growth into the business as well with a new bolt-on deal. Valmont has reached a deal to acquire irrigation parts provider HR Products. The Australian-based business is expected to add about $45 million in sales, adding about a percent to total sales. Unfortunately, no further details were announced other than that the deal will be accretive to earnings.

What Now?

With Valmont Industries, Inc. shares down to $288, down just over ten percent from late 2022, while the business has been on fire, its appeal has increased quite a bit. In fact, the earnings multiple has fallen from about 23 times earnings to about 19 times on the back of the lower share price and higher earnings, which quite frankly looks quite decent.

That being said, I am mindful of the fact that Valmont not always has been such a high-flier, and while I no longer fear the cyclicality of the margins that much, there definitely has been an element of inflation on the revenue base lately. This has certainly boosted the absolute operating profit number, which might revert in case price deflation kicks in.

Amidst this, I am reiterating my stance, albeit based on higher earnings power, which means that at a 17 times multiple of around $15 in earnings per share I am willing to initiate at $250, or perhaps a little bit above that if shares retest the June lows.