Valmont Industries, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 4/5

Valmont Industries is a global provider of engineered products and services, primarily for infrastructure and agriculture, with a focus on irrigation systems, infrastructure support, and engineered access solutions.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Valmont Industries, Inc. operates in three main segments: Infrastructure, Agriculture, and Engineered Support Structures.

  • Infrastructure

This segment makes up the most of Valmont’s revenue which consist of production of metal structures like poles for lighting, traffic, and wireless communication. It also provides related installation, coating, and engineering services. The segment’s revenue is primarily from the sales of steel and aluminum structures used for infrastructure projects, such as: traffic poles and lighting structures, and wireless communication structures, in addition to providing design, fabrication, and installation services. This is by far the largest segment of the company.

  • Agriculture

This segment consists of center-pivot irrigation systems, parts, and related equipment. The segment benefits from providing agricultural solutions and from new technologies. They have a diversified approach using different sales channels like direct sales, dealers, retailers etc. This segment primarily manufactures and sells mechanized irrigation systems and related parts to farmers globally. They also provide services such as irrigation system design and water management tools. Their customer base is mainly agriculture companies, and local farmers.

  • Engineered Support Structures

This segment is a smaller part of revenue compared to other two segments. Engineered Support Structures consists of manufacturing, and assembly of metal and composite structure and products.

This segment manufactures engineered metal and composite structures, including access systems such as ladders, platforms, and stairways as well as traffic-management products. They also offer a range of services like engineering and installation support.

The company’s diverse product portfolio allows it to participate in a number of different markets and mitigate risks. Geographically, Valmont derives a significant portion of its revenue from North America, but also has operations in Europe, Asia, and South America.

The revenue comes primarily from the sales of its products, and a portion from services like installation, repairs etc.

  • Infrastructure: Growing spending on infrastructure globally is a major tailwind for this sector. Governments are increasing infrastructure spending in their regions. The rising demand for renewable energy sources and smart city development leads to increased requirement for transmission, distribution, and lighting solutions. The need for 5G infrastructure also contributes to this sector’s growth.

  • Agriculture: The growth here is driven by the need to feed a growing global population more efficiently. Irrigation will be important as climate changes, and water-management technologies become more prevalent.

  • Engineered Support Structures: The need for infrastructure projects and improved access systems continues to drive demand.

Competitive Landscape

  • Infrastructure: The market is moderately competitive with the presence of other global and regional players. The company competes based on its manufacturing capabilities, engineering expertise, geographic presence, and the quality of its products and services. They need to secure contracts for larger projects, which requires competitive pricing.

  • Agriculture: The market is competitive with other manufacturers of center-pivot irrigation systems, and equipment. They need to innovate for improved efficiency, and offer strong customer relations and services to keep the market share.

  • Engineered Support Structures: They face competition based on pricing, customization, and the quality of the product. They also compete based on customer relationship, geographic presence, and the specialized skills.

Moat Analysis

Valmont Industries has some attributes that could be considered economic moats, but they are not particularly strong and sustainable, putting them at a rating of 2/5:

Narrow Moat:

Valmont has a narrow moat mainly due to its scale and distribution network.

  • Distribution Network (Agriculture & Infrastructure): Valmont’s established distribution network, especially in the agriculture segment through dealers, retailers, and direct sales, gives it a competitive edge due to the customer relationship and expertise it provides. They use a similar network model in their infrastructure business as well. Having such distribution network offers better product availability and efficient after-sales service.

  • Niche Position (Engineered Support Structures): Their niche in specialized industrial metal and composite structures allows it to have a more defensible competitive position. They have unique design, and expertise capabilities in this industry, making it hard for competitors to directly copy them.

Lack of Strong Moat:

  • High Competition: Valmont faces intense competition in all three segments which will impact long-term returns. Competition leads to price pressure, which will affect margins and reduce pricing power. In such competitive markets, the ability to get long-term contracts is difficult as other companies can match them or outbid them.

  • Technological Disruption: The company depends mainly on its current products, and while it is adapting to new technologies, it has not shown a history of heavy investment in R&D. It would be easier for tech companies that develop products for infrastructure, agriculture, or other industrial purposes to overtake the market share if they find a niche and disrupt.

  • Commodity Nature: Some of the main products of the company are not differentiated much, especially in the infrastructure segment, which are essentially commodities with similar production process and features. As commodities are driven by prices, pricing power is minimal, and this reduces the company’s ability to earn excess profit.

Risk Factors

Several factors pose a threat to the moat and business resilience of Valmont:

  • Commodity price risk: The company’s profitability is significantly influenced by raw material costs, particularly steel and aluminum. These prices are volatile, and increase in these prices would directly reduce the company’s profit. The company can hedge against commodity prices, but even then it can impact profit margins as they might not be able to pass on all costs to the end customer.

  • Technological disruption: In an ever-evolving market, there is a huge risk for the company for new technologies that could render their current products obsolete or make their products less competitive. It could also be affected by the technology disruption by its competitors as they might innovate more effectively.

  • Economic slowdown: A major recession could reduce the growth of their core sectors like agriculture and industrial output. This may limit their revenue growth, thereby impacting profits. It will be more apparent during infrastructure projects as they are likely to be reduced or deferred due to lower spending from the governments.

  • Geopolitical risks: The company operates globally, exposing it to the impact of local laws, regulations, and political instability. Changes in trade policies, currency fluctuation, or regulations specific to a certain region could impact revenues. Furthermore, conflicts, wars, and changing political policies can have an impact on their operations and supply chain.

  • Customer concentration: The company’s reliance on certain large customers, particularly in the agriculture and infrastructure sectors, could pose a threat if those customers encounter financial distress or decide to shift their business to a competitor.

*  **Acquisition Risk:** The company does significant M&A, acquisitions are important for company growth, but there is a risk of overpaying for the acquisitions, and failure to recognize expected synergies and return from them.

  • Debt and Interest Rate Risks: Increased levels of debt and fluctuation in interest rates can make it difficult for the company to finance future growth. They may need to increase prices to overcome such headwinds, but competitors may outbid them, making it harder to achieve better profit margins.

  • Climate Change: Changes in climate patterns, such as drought or excessive rainfall could impact farmers and reduce the purchase of new equipment, affecting demand for irrigation systems. They could also experience operational issues with power infrastructure and flooding.

  • Supply Chain Issues: Supply-chain issues stemming from various causes such as geopolitical issues, global health events, and material shortages will continue to have a significant impact.

  • Skilled Labor Shortage: It is expected that finding and retaining workers and employees with specialized skill will be a problem for the coming years. This increases the risk of operating with reduced capacity, and additional expenditure on labor.

Valmont’s ability to be resilient is dependent on its ability to adapt to technology, secure long-term contracts, and maintain strong relationships with its customer base. If Valmont is able to execute on that and maintain strong financials, it will be better able to compete and survive in the long run. They also need to focus more on efficiency, and improve the ability to pass-on increased costs to the end customers.

Financial Analysis

Valmont’s financials show a pattern of a mature industry. It’s very important to dig deeper and try to see the story behind the numbers.

  • Revenues: Valmont’s revenue is spread out over three segments but infrastructure makes up the biggest part of the revenue. The revenue growth has been consistent, but not spectacular. The company needs to continue to innovate and diversify its offerings in order to generate sustained revenue growth. Their growth is primarily dependent on long-term government infrastructure projects. There has been a positive growth in all segments. However, the revenue growth may be volatile at times due to the demand of commodities, which is closely linked to global economies.
  • Profitability: Gross margins of VMI are between 25% to 30%, while the operating margin is between 10% to 15%. The operating margin has been variable, which could be due to the industry dynamics and price pressures. With current inflation, the margins may be affected and the company may need to raise prices. However, in high competition markets it is often hard to pass on the increased cost. The company needs to focus more on high margins products and services.
  • Return on Invested Capital (ROIC): ROIC is a good measure of measuring the quality of a business. A high ROIC means a company is able to generate more profits compared to its investments. VMI’s ROIC has generally hovered around 10%, which is on a medium range, not low or high. This means the company has some competitive advantage, but it might have a tough time competing against other industry players that have stronger competitive advantages, or lower costs.
  • Free Cash Flow: Despite having a solid revenue, and a good profitability, the company’s free cash flow is not as good as other companies. There is often a fluctuation in free cash flow due to the company’s business model, which includes a lot of capital expenditure and research and development. They also make acquisitions that reduce their free cash flow. If the company focuses more on cash flow than earnings, there is a high potential for valuation improvement.

  • Debt and Capitalization: Valmont maintains a moderately leveraged capital structure. As of the latest reporting period, the company has a market capitalization of 3.5 billion and debt of around 1.4 billion. Having a higher leverage like that means, the company is also more exposed to the risks stemming from changes in interest rate.

  • Goodwill: It has a significant amount of goodwill on its balance sheet from past acquisitions, at times goodwill can increase significantly making it hard for investors to accurately measure long-term valuations.

  • Inventory: The company’s inventory levels have increased which raises the concern of obsolete and stale products.

  • Liquidity: Current ratio is at the 1.5 range which indicates a reasonable financial strength. However, it’s not that high, which means that some short-term and unexpected economic changes can impact the liquidity of the company.

Recent Concerns and Management Outlook

  • Inflation and supply chain constraints: In the recent quarterly results, management acknowledges the impact of inflation and supply chain disruptions on its business. Higher input costs, as well as shipping costs have been a drag in profit margins. There has also been supply chain related issues such as lack of chips. To cope with inflation and supply chain issues, the company is proactively working with its suppliers to ensure raw materials, and they are also passing-on costs to the end consumers.
  • Global uncertainties: The business is highly influenced by global geopolitical events. Recession risk in several key countries is also there. Company is closely monitoring the effect of war, global political instability, and any other macro headwinds and making plans to overcome them.
  • Acquisition: The company has also acquired several companies in the last year, which has improved its growth opportunities, but they are also hard to evaluate for their long-term potential, profitability, and whether the acquisitions will turn out to be successful. They are also adding some uncertainties as their integration into existing business operations is not instant, and may require sometime.

Despite these challenges, the company’s management seems confident about the long-term health and expansion of the business, owing to their strong backlog, new product introductions, diversified business lines, and solid fundamentals.

Management is focused on balancing growth, and profitability to enhance the long-term value for the shareholders.

Understandability

Valmont Industries gets a rating of 3/5 on the understandability scale. While their core business is simple enough to grasp, with its various segment, different types of projects, and global footprint, understanding all parts of their business can get complicated. This can sometimes make future predictions hard for new investors who have just started to follow the company.

Balance Sheet Health

The balance sheet health of the company is reasonably healthy and gets a score of 4/5. It’s important for a company that has exposure to commodity prices and fluctuating economic conditions. The company also has a history of making acquisitions, which increase the debt in its balance sheet, which should be looked upon closely. * The company has manageable debt, although some improvements can be made. * They have a decent liquidity to run operations, and have good credit rating. * The company is facing high inflation, and other supply chain related headwinds, which are affecting margins. But they are focused on cutting costs and improving efficiency. This helps in achieving financial stability.

Conclusion

Valmont Industries is a company in a reasonably good position, though it needs to be carefully evaluated for its competitive advantages. Its business seems durable and the company has been around for decades. However, investors must look deeply into the competitive environment, understand the risks and what actions management is taking to improve business value and growth. The management, however, has good track record, and are proactive in tackling company issues. For a long-term investment strategy, this company needs a lot of in-depth analysis.