Valmont Industries (NYSE: VMI) Began

Valmont Industries (NYSE: VMI) began in 1946 as Valley Manufacturing, a maker of farm elevators. The company expanded from there into irrigation products, steel tubing and piping, rebar and other steel products. The company is also engaged in the manufacturing and marketing of galvanized metals, communications towers, light poles and coatings. Valmont Industries was listed on the New York Stock Exchange in 2002 and is presently based in Omaha (Valmont Industries, 2010). The company has seen its revenues increase steadily since it became public. This paper will analyze the financial situation of Valmont Industries in order to determine the quality of the company as an investment.

Valmont competes in the metal fabrication sector. The industry is characterized by a number of medium and large companies, each competing in different products. Thus, for any given product, Valmont's competitor set will be different. Some of the firms involved are American Tower, Lindsay Corporation, Thomas & Betts, United States Steel and others (Yahoo Finance, 2010). The industry in total has a market capitalization of $29 billion, of which Valmont contributes $1.79 billion (MSN Moneycentral, 2010).

Financial Statements

Valmont Industries has a strong balance sheet. The company has grown significantly over the past five years, but has done so without taking on undue financial stress. The company has current assets of $755 million compared with current liabilities of $280 million for example, according to the 2008 Annual Report. A check of the interim balance sheet (2009 Q3) shows that the company has become smaller over the first three quarters of 2009 but their liabilities have declined in concert with assets. The 2008 Annual Report reveals a sharp increase in long-term debt, but the interim balance sheet for Q3 shows that the increase was paid down and now long-term debt is at its lowest point in six years (MSN Moneycentral, 2010).

According to the 2008 Annual Report, Valmont earned $1.907 billion in revenue in 2008, representing a 27.2% increase over 2007. The firm's revenues have increased steadily over the past five years. The trailing twelve months through 2009 Q3 showed revenues of $1.88 billion, which is only a minor decrease given the reduction in the firm's assets over the first three quarters of 2009. Valmont has been steadily profitable over the past five years and earned $132.4 million in 2008, an increase of 39.8% over 2007. The trailing twelve months net income through 2009 Q3 was $149.01 million, indicating that the company has in all likelihood improved profits through the economic downturn.

Valmont earned $52.58 million in cash from operating activities in 2008. This figure is roughly half what the company made from operations in 2007, but is in line with the 2006 figure. The company paid down a significant amount of debt (over $250 million) through the first three quarters of 2009, a period that has seen Valmont earn $439.5 million in cash from operating activities. That they are using their strong cash flows to reduce debt is evidence of fiscal prudence.

Over the past five years, Valmont's earnings per share have increased substantially, from $1.10 in 2004 to $5.04 in 2008. The result has been that retained earnings have improved significantly as well. Valmont does plow a substantial portion of its earnings back into growing the company, but retained earnings now sits at $624 million, compared to $324 million in 2004. The retained earnings as of 2009 Q3 were $740 million, an improvement of 18.5% over the 2008 figure in just three quarters.

Key Items

Valmont Industries is a solvent, liquid entity. The company's current ratio is an exception 2.6 and the quick ratio is 1.8. Interest coverage is 16 times and the company's debt/equity ratio is 0.7. These ratios are indicative of a company that has a strong financial position. More telling is that these ratios are improving over time. The debt/equity ratio at the end of 2008 was 1.12, so the current D/E ratio is a significant improvement in just nine months.

Valmont has strong margins that are superior to the industry average (MSN Moneycentral, 2010). The gross margin, for example, is 28.3% compared with an industry average of 22.9%. The net margin is 8.0%, compared with 6.2%. The firm's return ratios are also significantly better than average. Valmont's return on assets is 11.6, compared with 5.6; the return on equity is 21.7 compared with 4.2 and the return on capital is 15.5 compared with 6.6. Valmont also has strong efficiency ratios. Asset turnover is 1.5, compared with an industry average of 0.9; inventory turnover is 5.1 compared with 4.0 and receivables turnover is also strong at 6.1 compared with 6.4. Overall, Valmont Industries has strong ratios compared with other firms in its industry, and there is indication that key ratios are improving over time.

Valmont is considered by the market to have a relatively high volatility. The beta on Valmont' stock is 1.67. An analysis of the five-year chart (MSN Moneycentral, 2010) shows that the source of this volatility was a strong run up on Valmont stock in the 2006 and 2007 years, followed by a strong collapse. The stock, however, has outperformed the major indices at every point in the past five years, even with the large percentage price movements.

In 2009, Moody's upgraded its outlook for Valmont, from stable to positive (Moody's, 2009). The rating for Valmont debt is Ba1 at present, a low-level investment grade that reflects the company's relatively small size and weakness in the agricultural sector over the past year. Standard & Poor's also upgrade Valmont debt in 2009, from BB+ to BBB- (S&P, 2009).

Valmont stock is presently valued at $68.17 per share. This gives the company a price/earnings ratio of 12.00. The multiple reflects a firm with steady growth, but it appears that market enthusiasm is depressed slightly, a function of weakness in the agricultural sector. Valmont's other business lines have helped to insulate it from the impacts of the slowdown in agricultural spending, but its main businesses have slumped in the past year (Shute, 2009). The current share price is down from the 52-week high of $89.30 last August, but is a significant improvement over the 52-week lows of last February ($37.49).

Valmont Industries does not report on what it considers to be its cost of capital. Their debt is currently given a yield of XXX. The company's debt is due in May 2014 and although a yield was not readily available, 7.9% is in the range of corporates with a similar debt rating. The cost of equity would be based on the risk free rate of 0.08 plus the historic market premium of 7%. Using CAPM, this gives a cost of equity of 11.9%. The proportions of debt and equity to calculate the WACC are based on the most recently quarterly balance sheet and are 41.3% debt and 58.7% equity. This gives us a weighted average cost of capital of 10.24%.

Valmont has slowly increased its annual dividend over the past five years. In 2004, the dividend per share was $0.32; by 2008 it was $0.50. For Q2 of 2009, the quarterly dividend was increased from $0.13 to $0.15, which is an annualized $0.60. This equates to a dividend yield of 0.87%. This is a fairly low dividend for a company with the long history of Valmont Industries. However, Valmont has been on a slow but steady growth trajectory for the past several years, so its current dividend seems to be a blend of dividend policies. Valmont pays a dividend as a reflection of the firm's established nature, but it restrains dividend growth as a reflection of the degree to which management prefers to reinvest earnings. The company plowed back $194 million in 2008, for example.