2023-04-20 17:03:29 ET
Summary
- The dividend yield is too low for income seekers to consider the stock.
- The company's cash flows may see modest improvements in 2023.
- I believe Valmont Industries can grow revenue at a mid-single-digit pace in 2023 and beyond.
Valmont Industries ( VMI ) seems to foresee good growth prospects over the long term. But, I think the company is fully-valued and may have minimal upside. Given the low dividend yield offered by Valmont Industries, dividend income seekers may be better off investing in U.S. Treasuries . Investors should wait before adding Valmont Industries to their portfolio.
Modest revenue growth in 2023
The company grew revenue quickly in 2021 and 2022 (Exhibit 1) . Its quarterly revenue has grown by double-digit since June 2021. In the June 2022 quarter, the company booked over a billion dollars in quarterly revenue for the first time, achieving $1.13 billion (Exhibit 2) . Its Infrastructure and agriculture business segments grew by 15% and 21% y/y in Q4 2022 (Exhibit 3) . The company expects its end-market infrastructure and agriculture demand to continue for several years. But, given the rise in interest rates, future growth will likely be lower.
Exhibit 1:
Valmont Industries Annual Revenue, Gross, Operating Profits, and Margin (%) (Seeking Alpha, Author Compilation)
Exhibit 2:
Valmont Industries Quarterly Revenue, Gross, Operating Profits, and Margin (%) (Seeking Alpha, Author Compilation)
Exhibit 3:
Valmont Industries Q4 2022 Segment Revenue Growth (Valmont Industries Investor Presentation)
Stable margins
The company has shown remarkable stability in its gross and operating margins over the past decade, with a standard deviation of 125 and 187 basis points, respectively (Exhibit 1) . The company's annual gross margin and operating in 2022 were 25.9% and 10.2%, close to its average of 25.85% and 10.16%, respectively, over the past decade. Given the strength in the company's end markets over the past two years, it successfully defended its margins in the face of high inflation by increasing its prices.
The company has good gross margins compared to its peers (Exhibit 4) . Valmont Industries' gross margins were only beaten by Stantec (STN), a sustainable design and engineering firm which operates in the construction and engineering industry but is a much different company compared to Valmont Industries. It is challenging to find comparable like-for-like companies in any sector. This is the closest we can get to comparing margins across construction & engineering companies.
Exhibit 4:
Latest Quarter Gross Margins for Construction & Engineering Companies (Seeking Alpha, Author Compilation)
Normalizing inventory levels in 2023
The company saw its inventory cost increase in 2021 but deftly managed its inventory in 2022, maintaining it at the same level as in 2021. The company carried 83 days of inventory compared to its average of 72, with a standard deviation of 13 over the past decade. Over the past two years, many companies across various sectors have struggled with inventory costs, given the uncertainty in demand and supply and the higher prices of raw materials, labor, and freight (Exhibit 5) . But, raw material costs have come down from their peak, and supply chains are normalizing after the pandemic-induced disruptions.
Exhibit 5:
Valmont Industries Inventory & Day's Sales in Inventory (Seeking Alpha, Author Calculations)
Expect marginal growth in cash flows in 2023
The company's operating cash flow suffered in 2021 due to a change in inventory costs of $289.9 in 2021 compared to 2022. Its operating cash flows were a meager $65.9 million in 2021 compared to $316.3 million and $326.3 million in 2020 and 2022, respectively. The company is projecting a revenue increase of 4% to 7% in 2023. If the company can generate 12% EBITDA and 5.2% Free Cash Flow margin, it should generate $548 million in EBITDA and $237 million in Free Cash Flow. After accounting for share repurchases, the company should see approximately a 3% increase in free cash flow yield per share, a minor change in the company's profitability (Source: author estimates and calculations).
Low dividend yield
The company paid $46 million in total dividend payments in 2022, with a forward annual payout of $2.40. The dividend yield is 0.83%, and a payout ratio of 15.4%, a sustainable payout. The company has grown its dividend at a CAGR of 9.6% over the past ten years, a good pace of growth. But, the stock's high valuation has depressed its dividend yield compared to the Vanguard S&P 500 Index ETF ( VOO ), which offers a 1.59% yield, and the Vanguard Industrials Index ETF ( VIS ) yield of 1.46%.
Valmont Industries is fully valued
Valmont Industries is fully valued with its forward GAAP PE ratio of 19.8x and a PEG ratio of 0.93x, close to 1. The PEG ratio may indicate that the stock is fully valued even after accounting for its expected growth in earnings per share.
A discounted cash flow model puts the per-share equity value at $244, about 17% below its current price of $294 (Exhibit 6) . This model assumes the 2023 consensus revenue estimate of $4.57 billion as the starting point with a growth rate of 4% and a free cash flow margin of 5.2%, its average over the past decade. A liberal 8% discount rate is used in this model.
Exhibit 6:
Valmont Industries Discounted Cash Flow Model (Seeking Alpha, Author Calculations)
The company's low debt may justify this discount rate, but given the rise in interest rates, the cost of capital has increased for companies globally. The company carries low levels of debt with a debt-to-EBITDA ratio of 1.8x. The company carried total debt of $878 million and net debt (after cash and short-term investments) of $692 million at the end of December 2022 (Exhibit 7) . It has a low free cash flow yield of 3.5% and trades at an EBITDA multiple of 11.8x based on the company's 2022 EBITDA. The company generated $10.79 per share in free cash flow (operating cash - CapEx). But the stock has run up so much that its free cash flow yield has dropped.
Exhibit 7:
The stock has risen 19.6% over the past year, while the S&P 500 Index ( SP500 ) has dropped 6.8%. The stock's momentum had faded over the past nine months when it returned over 33%, with the stock returning 3% over the past six months while dropping 9.9% over the past three months. The RSI and MFI technical indicators are below 40 and trending toward oversold levels (Exhibit 8) . Given the technical indicators, the stock may see a short-term bounce, but there is little upside, given its cash flow generation powers and high valuation. The stock has a Beta of 1.07 , indicating it moves in line with the markets, and any market volatility will push it down.
Exhibit 8:
Valmont Industries RSI and MFI Technical Indicators (Seeking Alpha)
Valmont Industries is richly valued with limited upside. It may see a short-term boost to its price since it has underperformed the market, and the technical indicators are approaching oversold levels. The company's dividend yield is too low for this current rate environment. The high valuation, coupled with the low dividend yield, would give the stock a hold rating. Existing investors should continue holding it while waiting for a pullback to add more to their portfolio.
For further details see:
Valmont Industries: Limited Upside