Valmont Industries: Made Of Steel (NYSE:VMI)

Shares of Valmont Industries (NYSE:VMI) have been on fire in recent times, warranting an update which is long overdue as my last take dates back to 2015 when I concluded that I was waiting to pull the buy trigger.

A Small Recap

Back in 2015, Valmont was active in the production of a range of fabricated metal products, including traffic signals, parking lot lighting poles and towers. Other areas included transmission poles for the utility sector, irrigation equipment for the agriculture industry and zinc coatings.

These are niche markets which should allow Valmont to not just compete on price, thereby avoiding too low margins and huge cyclicality of commodity price swings and stiff price competition. This comes as Valmont looks to provide value-add as well through service and custom-made product designs.

Drivers behind the business were greater infrastructure spending and investments in the utility sector, both sectors with sound long term prospects. Despite long term tailwinds, Valmont suffered from headwinds back in 2015 on the back of austerity, softer commodity pricing and reduced infrastructure spending.

The company reported sales of just over $3 billion with earnings seen above $8 per share, while shares traded in the $120s at the time. A resulting 15 times earnings multiple and leverage position equal to reported EBITDA looked fair, but these were entirely different times in terms of valuations of course. Moreover, earnings came in way short of $8 per share going forward, pushing up valuations multiples along the way.

A Boom

After a brief decline towards the $100 mark in 2016, shares have mostly traded in a $100-$150 range until the outbreak of the pandemic. Shares rallied to the $200 mark in 2021 as shares have only risen further to now trade around their all-time highs at $325 per share.

Between 2015 and 2021, the company has grown sales from just around $3.3 billion to $3.5 billion in 2021. By now the company posts sales across four segments: a $1.1 billion utility support structure business, a $1.1 billion engineered support structures, a $1.0 billion irrigation segment and a smaller $0.4 billion coatings business as adjusted earnings rose to $10.92 per share.

The reality is that a cumulative 10% revenue growth and about 40% earnings per share growth looks solid, but mostly reveals an increase in the valuation. With earnings power close to $11 per share, earnings multiples have risen a lot, with shares now trading at 30 times earnings reported for 2021. With net debt of $770 million inching up a bit, leverage ratios came in around 1.9 times EBITDA.

Growth was in part driven by higher steel prices which results in higher pricing, with 2022 sales seen rising further to $3.8-$4.0 billion, as adjusted earnings were seen between $12.25 and $13.00 per share.

Following strong 2021 results the company hiked the dividend by 10% in February to $2.20 per share, as the increased payout ratio still results in a dividend yield far below 1%. In April, Valmont posted a 26% increase in first quarter sales as full year sales are now seen up 14%, with the midpoint of the adjusted earnings guidance hiked to $13.25 per share.

Second quarter sales rose even as much as 27%, with full year sales now seen up more than 20% this year, as adjusted earnings per share are now seen at a midpoint of $13.80 per share. Net debt has inched up to $847 million, mostly the result of higher working capital requirements and small M&A actions. After another 27% increase in third quarter sales, the company sees full year sales up 22%, as the midpoint of the adjusted earnings guidance has been hiked in a minimal fashion to $13.825 per share.

Despite the very strong earnings growth, it is the share price advancement which has outpaced the operational achievements. Based on the latest outlook, the company trades at around 23 times earnings, a demanding multiple. While net debt fell below the $800 million mark and EBITDA continues to improve, the reality is that the valuation looks a bit full. The 21.5 million shares now represent an equity valuation at $7.0 billion, for a $7.8 billion enterprise valuation, equal to nearly 2 times sales.

In November, Valmont announced the divestment of its offshore wind business to Danish-based Euro Steel. No sales price has been announced, other than that sales of the unit came in around $100 million, as the company expects to incur a roughly $30 million loss.

A Concluding Remark

While the company has seen very strong operational performance this year, I am careful to extrapolate this momentum, certainly as higher valuation multiples are applied to these strong earnings. This makes me very hesitant as shares have risen a $100 from the lows this summer already, marking too strong momentum in recent times for me to get involved.

Given the structural growth, accompanied by a cyclical component, I am happy to pay a market multiple of 17 times on current earnings, marking that I am happy to initiate a position between $200 and $250 per share.