U.S. Heat Wave Makes Lindsay Corp. a Hot Stock
It’s going to be a hot one.
Across the country, 100-degree scorchers have forced people indoors, raised cooling bills and pushed outdoor barbeque attendance to all-time lows (so I assume).
But the heat’s also causing dislocations in our food production and, in turn, food prices.
Heat kills crops, especially when it’s accompanied by a serious drought like this one. Across the Midwest, states are receiving less than half their normal rainfall. A survey of corn crops report that only 56% are considered in “good condition” – a 20-year low.
The United States isn’t the only area in trouble, either. Russia’s wheat production has been cut 10% thanks to its own drought. And, ironically, heavy monsoons in India have threatened rice and soybean production.
The effects have been strong, too. Since June 15, corn prices have jumped 43%. Wheat is up 32%.
I’m not going to argue about whether or not this is one bad growing season or a sign of global warming. (Although, there’s a strong case for trouble ahead in global food production. You can find all out about it here.)
Either way, to beat the heat and keep producing, farmers need to pour capital into their land.
When you think about profiting from farming, Deere & Company (NYSE: DE) and Caterpillar (NYSE: CAT) come to mind. But there’s a more direct play on the drought – one with even greater potential.
The cure for drought is, of course, water. And as you know, when water doesn’t come from the sky, it comes from irrigation.
So the next logical step is to look to the best pure-play irrigation provider, Lindsay Corp. (NYSE: LNN).
Most irrigation is of the gravity/furrow type, which essentially means you dig some narrow channels and dump water into them.
Lindsay’s systems are better. The company is the market leader in pivot and lateral irrigation systems like the one pictured to the right.
Water lines are raised off the ground by scaffolding on wheels. And the water can be directed at certain trouble areas or spread out evenly. Essentially, since you’re not depending on gravity alone, the method increases efficiency drastically – applying water to the proper areas up to 98% of the time.
It’s no surprise that the method has gained so much favor with farmers. According to the USDA, in 1998, only 35% of U.S. farmland used pivot or lateral irrigation. By 2008, that percentage grew to 46%.
As a result, Lindsay’s been growing, as well. In the last fiscal year, revenue jumped 33%. The most recent quarterly earnings showed earnings per share rose 22%.
Shares are on the move, too. The stock has climbed since the start of the drought, aided by a June 27 earnings report that beat analysts’ estimates. Even so, the stock is cheap by historical standards. It trades at a forward price-to-earnings of 18, down from as high as 47 last year. So investors expect the growth to continue.
As a final kicker, last week, President Obama finally signed a $105 billion highway transportation bill that had been delayed for three years. This removes a major source of uncertainty for Lindsay’s second business, which involves specialty highway construction materials. It accounts for only 12% of the company now, but the business is growing.
Bottom line: Even if this drought is temporary, the world is facing a long-term shortage of water – and potentially food – on the horizon. I like Lindsay Corp. as the most profitable way to play it.
Ahead of the tape,
Matthew Weinschenk
P.S. We have another agricultural innovator in our portfolio that increases farm efficiency using radical space-age technology. A food crisis will send this stock through the roof. Click here to read all the details.
Related Topics: Commodities, Market Analysis, U.S.
