2023-10-04 11:03:47 ET
Summary
- Valmont Industries, a US producer of metal products, has a strong history but now may not be the time to add to existing positions.
- The long-term MACD indicator and MACD histogram suggest that Valmont's stock may continue to decline.
- In the second quarter, agriculture revenues dropped by almost 26%, indicating a struggle to maintain pricing power.
Intro
Valmont Industries, Inc. ( VMI ) is a US producer of metal products that sells into international markets worldwide. Through its two segments (Agriculture & Infrastructure), Valmont provides an array of products from the likes of steel & electrical transmission solutions on the infrastructure side to pivot components & irrigation equipment on the agricultural side of the business. The company has a strong 77-year history and has paid out consecutive annual dividends for the past 33 years & counting. Suffice it to say, given the significant capital appreciation in Valmont's share price over the past three decades, in particular, the company has been able to garner the trust of many investors in the process.
However, if we pull up a chart of the industrial company, we see that now may not be the time to add to existing positions in Valmont. Although shares have not entered bear-market territory, we do have a few long-term warnings that may be pre-empting more downside in this play this year. For one, shares delivered a bearish crossover of the popular MACD indicator earlier this year which prompted a significant move lower as a result. Although for now, the stock's 40-month average has been trying to put a stop to the selling, we are doubtful whether this support level will put a stop to the decline in earnest.
The technical reason is two-fold. For one, look at how high that MACD indicator got to before it finally delivered a bearish crossover. What we mean by this is that the higher this indicator stretches above the mean, the more oversold the shares become as a result.
Furthermore, this indicator is particularly noteworthy on long-term charts due to the amount of info digested and the dual nature of the indicator (trend & momentum). Therefore, taking this into account, look at the MACD histogram (Measures if MACD moving averages are converging or diverging) has continued to fall since it entered bearish territory. What this means is that (at least from a technical standpoint), Valmont's latest multi-month down-move has not lost any of its potency. This most likely means lower lows still remain on the cards going forward.
Q2 Trends - (Better Profitability On Lower Revenues)
When we go to the company's recent Q2 earnings report and study the CFO's comments on guidance and growth trends, we see how the company's near-term fundamentals seem to tie in with the technicals discussed above. Remember, the market is constantly trying to decipher Valmont's earnings growth curve and then relate this info with the stock's valuation at the time.
In the second quarter, sales growth in the bigger infrastructure segment was not enough to compensate for the declines in agriculture. Revenues fell almost 8% as a result. The real issue though is that agriculture revenues dropped by almost 26% to come in at approximately $280 million for the quarter. The issue here for Valmont is a significant reduction in equipment demand which demonstrates to me this market will struggle to maintain its upward curve of pricing power if indeed customer demand levels continue to be depressed over the near term.
With respect to profitability, there were definitely some encouraging trends in the second quarter. Despite the downdraft in agriculture as discussed above, operating profit increased by 12% & operating margin surpassed 13% in the quarter. Operational efficiencies & optimization of pricing in both segments were the principal reasons for Valmont's operating margin expansion where management actually sees more runway for improvement in these areas going forward.
While this may be so, eking our operational efficiencies over a sustained period of time is always difficult when revenue growth levels are subdued. In fact, due to recent trends, management is now guiding approximately 1% top-line growth this year which is down from the 5.5% (approx.) growth number previously estimated. While there has been no change to bottom-line fiscal 2023 guidance thus far, it will be interesting to see if the outlook will remain the same over the next two quarters, especially when one observes how consensus EPS revisions continue to come under pressure for both Q3 & Q4.
To this point, management has already stated that the gross margin for the latter part of the year will not be able to keep up with the first two quarters due to more international projects on the agricultural side (lower margin) & due to the impact of the higher cost of purchased hot-rolled coil steel earlier in the year which now will begin to present itself in Valmont's financials over the next few quarters. Suffice it to say, that if external trends regarding demand, costs & sales mix continue to deteriorate, then EPS revisions will continue to come under pressure as we see below.
Conclusion
To sum up, Valmont remains a well-run company where management continues to have the wherewithal to improve operations and earnings as a result. However, external factors particularly in the agriculture segment continue to weigh down revenue growth over time. We believe things may get worse here before they get better which is why VMI is a 'Sell' for us at the moment. We look forward to continued coverage.
For further details see:
Valmont: Negative EPS Revisions And Bearish Technicals Point To Lower Prices