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Daniel Fotinich, Mercedeh Sabeti, Nicholas Lee, Thania Amberiadis.

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Presentation on theme: "Daniel Fotinich, Mercedeh Sabeti, Nicholas Lee, Thania Amberiadis."— Presentation transcript:

1 Daniel Fotinich, Mercedeh Sabeti, Nicholas Lee, Thania Amberiadis

2 Agenda Industry Overview Company Overview Thesis Drivers Valuation

3 Industry Irrigation is the application of water to land to assist in the production of crops  Traditional irrigation (gravity flow, flood irrigation)  Mechanical irrigation (center pivot, lateral) Industry Players  Valmont and Lindsay (75% market share)  T-L Irrigation and Reinke Acres Irrigated by Method (USDA)

4 Types of Mechanical Irrigation Systems Center Pivot Center Anchor, spins in a circle Long life span, automated, with low maintenance and labor costs Considered the best irrigation system for a majority of farms Lateral Move Same as the Center pivot but follows a square pattern Micro-Irrigation Micro-Irrigation has a shorter lifespan, is more labor intensive, has higher maintenance costs, but is more water efficient Has a close by water source that releases slowly Able to use waste water Directly above the plant, can accommodate vine agriculture better Micro-Sprinkler Small sprinklers that spray water Traveling Gun Irrigation system that uses a hose with high water pressure to distribute water Requires more energy Labor intensive

5 Center Pivot Irrigation Benefits: Longer lifespan (20-25 years) Low labor & maintenance costs Used for rough terrain Utilize pesticides in the system itself Self propelled system that rotates around a central pivot point Depth of water determined by speed at which system moves around field More water applied the longer it takes the system to complete a transition

6 Company Overview Leader in water management and road infrastructure products and services Irrigation System Segment  Center Pivot  Lateral Move  Hose Reel  Infrastructure Segment  Moveable & Specialty Barriers  Road Safety Equipment  Railroad Structures 9500 P 7500 P 8500 P

7 Business Model Dealers Farmers Process Lindsay manufactures their irrigation systems on a project basis and distributes them through an extensive network of dealers Dealers serve as a local point of contact and a holistic service, helping farmers pick customized solutions and solve any issues they have with their products. Center Pivot itself is usually around 50% of the purchase Other 50% is irrigation infrastructure: Pumps, base, electricity, etc

8 Valmont Industries Valmont is the original pioneer of the center pivot irrigation system, under their banner Valley Irrigation They are still the leading provider with a 43% market share, but we believe that Lindsay will outperform Valmont and is the top irrigation choice for three reasons: Lindsay has more readily innovated its center pivot and has a stronger product, distributed through its expansive dealer network Lindsay has taken ~6% market share from Valmont in the past decade Lindsay is a pureplay on irrigation, while Valmont’s business lines are largely diversified Positive tailwinds in irrigation industry will affect Lindsay more directly than Valmont

9 International Opportunities Over 91% of the world’s irrigated land is irrigated through traditional methods, and less than 4% is fully mechanized. Lindsay has the most widespread and reliable dealer network of any of its competitors.

10 Investment Thesis Weather Concerns Shift from Dry Land Farming to Irrigated Farming Population Growth & Government Subsidies Emerging Market Growth International Irrigation Market Drivers Well-positioned in the irrigation industry to take advantage of these trends Lindsay Corporation

11 Weather Concerns Projections show that drought is likely to continue in the United States and many places abroad When farmers fear drought, they’re more likely to purchase irrigation systems

12 Dry Land v. Irrigated Farming Dry Land Farming Arid areas without irrigation Drought resistant crops Soil protected from evaporation Yield enhancement opportunity Irrigated Farming Application of water 17% of land is irrigated 40% of the world’s food supply 46% of irrigation systems sold by Lindsay

13 Government Involvement In the US and Europe, farming is heavily subsidized – $45B/y in EU, $30B/y in US As developing countries grow, farmers’ wealth and farming subsidies will increase to drive food production higher – Growing populations Leads to more money available to spend on efficient, long lasting irrigation systems

14 Emerging Market Growth GDP Per Capita % Growth Wealth increases will shift consumer eating demand from agriculture to meat, requiring higher levels of output Per McKinsey “By 2025, more than half of the world's population will have joined the consuming classes, driving annual consumption in emerging markets to $30 trillion.”

15 Brazil Brazil is the fastest growing agricultural producer and is expected to one of the biggest, if not the biggest producer in the coming years World Trade Organization (2010) Total spending in Agricultural and Livestock Plan is $38 billion $2 billion is specifically allocated for the financing of agricultural investments There is significant room to increase irrigation penetration Area Available for Agriculture: 282 million hectares Area Cultivated: 65 million hectares Area Irrigated: 5 Million Hectares

16 Ukraine Historically, % of agricultural land irrigated was flat at 5.26 % from 2006 – 2010 Lots of conversion to irrigated land, especially in southern areas starting in 2010 Currently in the end stage talks for China to loan $ 3 billion Will start in mid 2014 Cover 1.3 million hectares Since then, Ukraine has made serious moves to improve its agricultural sector

17 Expected and actual commodity prices can influence farmers’ decisions to purchase extra equipment These fears are largely short-term and vary across regions Corn Prices This largely affects only their US irrigation business Long-term, corn price fluctuations shouldn’t dictate farmer demand for modern irrigation

18 Variant Perception Corn prices will continue to decline and affect their irrigation business International markets can’t grow as fast as they have Infrastructure segment is lagging The StreetBIG Much more irrigation international growth Upside potential from large projects Concerns over corn prices are very short-term and US- focused Company valuation at 13 P/E does not factor in this growth

19 Valuation Fair ValueProbabilityScenario2015 Price 25%Slight decline to flat growth in US Revenue 20-30% increase in international revenue Slight infrastructure segment growth 10-12% Y/Y Revenue Growth $96.23 $89.4550%Slight decline to flat growth in US Revenue 20% increase in international revenue Flat infrastructure segment growth 6-10% Y/Y Revenue Growth $91.17 25%Steep decline in US Revenue 11% increase in international revenue Steep decline in infrastructure segment -2%-2% Y/Y Revenue Growth $79.21

20 Recommendation Purchase 5% position at current stock price of $77-$78 tomorrow morning

21 Q&A

22 Appendix

23 Valuation: Base Case FY2012FY2013FY2014EFY2015E Revenues $551,255 $690,848 $732,940 $795,749 COGS 402,737 496,014 531,382 576,918 Gross Profit148,518194,834201,559218,831 Operating Expenses 83,008 87,773 93,157 101,140 Operating Income 65,510 107,061 108,402 117,691 Net Income 43,277 70,570 72,457 78,666 EPS $3.38 $5.45 $5.60 $6.08

24 Valuation: Upside Case FY2012FY2013FY2014EFY2015E Revenues $551,255 $690,848 $759,542 $839,972 COGS 402,737 496,014 550,668 608,980 Gross Profit 148,518 194,834 208,874 230,992 Operating Expenses 83,008 87,773 96,538 106,760 Operating Income 65,510 107,061 112,336 124,232 Net Income 43,277 70,570 75,086 83,038 EPS $3.38 $5.45 $5.80 $6.42

25 Valuation: Downside Case FY2012FY2013FY2014EFY2015E Revenues $ 551,255 $ 690,848 $ 679,773 $ 691,343 COGS 402,737 496,014 492,836 501,223 Gross Profit 148,518 194,834 186,938 190,119 Operating Expenses 83,008 87,773 86,399 87,870 Operating Income 65,510 107,061 100,538 102,250 Net Income 43,277 70,570 67,201 68,344 EPS $ 3.38 $ 5.45 $ 5.19 $ 5.28

26 Center Pivot Before the invention of the center pivot, there were a number of inefficient irrigation methods that required lots of input (water, labor, energy) and were not very versatile. Design Span: pipe between two towers Towers: Support and wheels Outlets and Emitters/Droppers: Release water Advantages Water output precision Automated process that requires little labor and maintenance Long Lifespan of 20-25 years Can emit pesticides

27 Infrastructure Segment 15% of Revenue Closely linked to government spending As emerging market countries increase their wealth, there is greater focus on developing infrastructure Golden Gate Bridge Highway – $14.1 million contract – Moveable barrier procurement from Lindsay as part of $26.5 million bridge project

28 Russia Historically, Russia has had very low irrigation penetration, especially after the disbandment of the Soviet Union and deterioration of previously state-owned capital Production as of 2011 has still not hit Soviet Union levels, and there is significant opportunity here for irrigation to increase yields

29 Corn Prices

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