Valmont Industries (NYSE: VMI) Began Thesis

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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).

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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.

Conclusion

Despite hard times in Valmont's core agricultural business, the company has maintained its growth poster. Valmont has continued to build its revenues, improve its profitability and lower its debt load over the course of the past several years. In the short-run, Valmont still expects to have some revenue pressure as.....

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