Rating Update: Stock Rating D-Negative (1/11/24)-Valmont Industries Inc (VMI).

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BUSINESS

Valmont Industries, Inc. produces and sells fabricated metal products in the United States, Australia, Brazil, Denmark, and internationally. It operates through two segments: Infrastructure and Agriculture. The company manufactures and distributes engineered metal, steel, wood, aluminum, and composite poles, towers, and components for lighting, traffic, and wireless communication markets; engineered access systems; integrated structure solutions for smart cities; and highway safety products. It also offers engineered steel and concrete pole structures for utility transmission, distribution, substations, and renewable energy generation equipment; and inspection services. In addition, the company provides hot-dipped galvanizing, anodizing, and powder coating services to preserve and protect metal products; and water management solutions and technology for precision agriculture.
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INVESTMENT RATING

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VMI’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be an important Value Builder.

Valmont Industries has a current Value Trend Rating of D (Negative).
The Value Trend Rating reflects inconsistent signals from PTR’s two proprietary measures of a stock’s attractiveness. Valmont Industries has a neutral Appreciation Score of 49 but a poor Power Rating of 25, producing the Negative Value Trend Rating.

Valmont Industries’ stock is selling well below targeted value. The current stock price of $227.00 compares to targeted value 12 months forward of $307.
This neutral appreciation potential results in an appreciation score of 49 (51% of the universe has greater appreciation potential.)
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Valmont Industries has a Power Rating of 25. (This poor Power Rating indicates that VMI only has a better chance of achieving attractive investment performance over the near to intermediate term than 25% of companies in the universe.)
Factors contributing to this poor Power Rating include: the trend in VMI’s earnings estimates has been unfavorable in recent months; recent price action has been unfavorable; and the Fabricated Structural Metal comparison group is in a slightly weakened position currently.

INVESTMENT PROFILE

VMI’s financial strength is average. Financial strength rating is 53.
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Relative to the S&P 500 Composite, Valmont Industries Inc has neutral Growth/Value characteristics; its appeal is likely to be to investors neutral towards Income; the perception is that VMI is normal risk. The only positive is VMI high historical growth. Low financial strength is a relative weakness for VMI. VMI’s valuation is moderate: moderate dividend yield, moderate P/E ratio, and moderate price/book ratio. VMI has unusually low market capitalization.

CURRENT SIGNALS

Valmont Industries’ current operations are eroding. Return on equity is falling, reflecting: declining pretax margin; falling tax keep rate; and falling leverage.

Valmont Industries’ current technical position is mixed. The stock price is in a 3.5 month up move. The stock has appreciated 26.2% from its prior low. The 200 day moving average is in a downtrend. The stock price is above its 200 day moving average.

ALERTS

Marginal positive changes in Valmont Industries Inc (NYSE: VMI) fundamentals have recently occurred: significant quarterly earnings acceleration occurred.
In light of this new information we are reviewing our current Overall Rating of D. This review will be completed in the next several days.
Valmont Industries Inc (NYSE: VMI) has reported E.P.S. of $1.39 for its fourth fiscal quarter (ending December 31) versus $1.89 for the same period a year ago. For the latest four quarters through December 31, E.P.S. were $6.85 compared to $11.77 a year ago.
Valmont Industries Inc (NYSE: VMI) stock closed at $227.00 on 2/21/24 after a modest gain of 0.5%. Moreover, unusually high trading volume at 156% of normal accompanied the advance. The stock has declined -4.8% during the last week and has been weak relative to the market over the last nine months.

CASH FLOW

In 2022, Valmont Industries generated an increase in cash of +$8.2 million (+5%). Sources of cash were very slightly larger than uses. Cash generated from 2022 EBITDA totaled +$529.3 million. Non-operating uses consumed -$23.3 million (-4% of EBITDA). Cash taxes consumed -$115.4 million (-22% of EBITDA). Re-investment in the business amounted to -$195.5 million (-37% of EBITDA). On a net basis, debt investors removed -$130.0 million (-25% of EBITDA) while equity investors withdrew -$56.9 million (-11% of EBITDA).
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Valmont Industries’ Non-operating Income, %EBITDA has exhibited little to no overall change over the period. This stability was accompanied by stability for the Valmont Industries Peer Group as well. In most years, Valmont Industries was in the top quartile and third quartile. Currently, Valmont Industries is substantially below median at -4% of EBITDA (-$23.3 million).

Valmont Industries’ Cash Taxes, %EBITDA has exhibited a very small overall uptrend over the period. This improvement was accompanied by a similar trend for the Valmont Industries Peer Group. In most years, Valmont Industries was in the second quartile and top quartile. Currently, Valmont Industries is lower quartile at -22% of EBITDA (-$115.4 million).

Valmont Industries’ Business Re-investment, %EBITDA has suffered a volatile overall downtrend over the period. This downtrend was accompanied by a similar trend for the Valmont Industries Peer Group. In most years, Valmont Industries was in the second quartile and lower quartile. Currently, Valmont Industries is slightly above median at -37% of EBITDA (-$195.5 million).

Valmont Industries’ Debt Investors, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Valmont Industries Peer Group. In most years, Valmont Industries was in the third quartile and second quartile. Currently, Valmont Industries is substantially below median at -25% of EBITDA (-$130.0 million).

Valmont Industries’ Equity Investors, %EBITDA has enjoyed a very strong overall uptrend over the period. This improvement was accompanied by a similar trend for the Valmont Industries Peer Group. In most years, Valmont Industries was in the lower quartile and top quartile. Currently, Valmont Industries is above median at -11% of EBITDA (-$56.9 million).

Valmont Industries’ Change in Cash, %EBITDA has experienced a downtrend over the period. This downtrend was accompanied by a similar trend for the Valmont Industries Peer Group. In most years, Valmont Industries was in the lower quartile and top quartile. Currently, Valmont Industries is at median at +2% of EBITDA (+$8.2 million).
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Valmont Industries’ Cash, %Revenue has experienced a small downtrend over the period. This downtrend was accompanied by a similar trend for the Valmont Industries Peer Group. In most years, Valmont Industries was in the second quartile. Currently, Valmont Industries is at median at +4%.

PROFITABILITY

Valmont Industries’ return on equity has been stable since 2013. The current level of 10.3% is 2.37X the low for the period and is -43.5% from the high.
This stability was due to strong negative trend in pretax operating return and strong positive trend in non-operating factors.
The productivity of Valmont Industries’ assets remained stable over the full period 2013-2023: asset turnover has exhibited little to no overall change even as it experienced very sharp improvement from the 2020 level.
Valmont Industries’ pretax margin experienced a volatile overall downtrend over the period 2013-2023.
Non-operating factors (income taxes and financial leverage) had a significant positive influence on return on equity.
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Valmont Industries’ return on equity is substantially below median (10.3%) for the four quarters ended September, 2023.
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Operating performance (pretax return on assets) is below median (7.4%) reflecting asset turnover that is upper quartile (1.23X) and lower quartile pretax margin (6.0%).
Tax “keep” rate (income tax management) is lower quartile (59.8%) resulting in after tax return on assets that is at the lower quartile.
Financial leverage (leverage) is above median (2.32X).

GROWTH RATES

There are no significant differences between Valmont Industries’ longer term growth and growth in recent years.
Valmont Industries’ historical income statement growth has been in line with balance sheet growth. Revenue growth has paralleled asset growth; earnings growth has paralleled equity growth.

Annual revenue growth has been 5.5% per year. (More recently it has been 14.0%.)

Total asset growth has been 5.5% per year.

Annual E.P.S. growth has been 8.4% per year. (More recently it has been 26.3%.)

Equity growth has been 4.5% per year.

Valmont Industries’ consensus growth rate forecast (average of Wall Street analysts) is 11.2% — substantially above the average of the historical growth measures.
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Relative to the Valmont Industries Peer Group, Valmont Industries’ historical growth measures are erratic. E.P.S. growth (8.4%) has been above median. Revenue growth (5.5%) has been at median. Total asset growth (5.5%) has been substantially below median. Equity growth (4.5%) has been lower quartile.

Consensus growth forecast (11.2%) is at the upper quartile.
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PRICE HISTORY

Over the full time period, Valmont Industries’ stock price performance has been variable and significantly below market. Between April, 2013 and February, 2024, Valmont Industries’ stock price rose +56%; relative to the market, this was a -50% loss. Significant price move during the period: 1) March, 2020 – November, 2022: +220%.
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TOTAL INVESTMENT RETURNS

Current annual total return performance of -30.9% is lower quartile relative to the S&P 500 Composite.
In addition to being lower quartile relative to S&P 500 Composite, current annual total return performance through January, 2024 of -30.9% is lower quartile relative to Valmont Industries Inc Peer Group.

Current 5-year total return performance of 13.0% is above median relative to the S&P 500 Composite.
Through January, 2024, with above median current 5-year total return of 13.0% relative to S&P 500 Composite, Valmont Industries’ total return performance is above median relative to Valmont Industries Inc Peer Group.
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VALUATION BENCHMARKS

Relative to S&P 500 Composite, VMI’s overall valuation is low. The highest factor, the price/earnings ratio, is above median. Ratio of enterprise value/assets is slightly above median. Price/equity ratio is at median. Ratio of enterprise value/earnings before interest and taxes is lower quartile. The lowest factor, the ratio of enterprise value/revenue, is lower quartile.

Relative to Valmont Industries Peer Group, VMI’s overall valuation is high. The highest factor, the price/earnings ratio, is upper quartile. Ratio of enterprise value/assets is above median. Price/equity ratio is at the upper quartile. Ratio of enterprise value/revenue is at median. The lowest factor, the ratio of enterprise value/earnings before interest and taxes, is at the lower quartile.
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Valmont Industries has a large value gap compared to median valuation. For VMI to fall to lower quartile valuation, its current ratio of enterprise value/revenue would have to decline from the current level of 1.37X to 1.24X. If VMI’s ratio of enterprise value/revenue were to decline to 1.24X, its stock price would be lower by $-28 to $199.
For VMI to achieve upper quartile valuation relative to the Valmont Industries Peer Group, its current ratio of enterprise value/revenue would have to rise from the current level of 1.37X to 2.26X. If VMI’s ratio of enterprise value/revenue were to rise to 2.26X, its stock price would increase by $183 from the current level of $227.

VALUE TARGETS

VMI’s future returns on capital are forecasted to exceed the cost of capital. Accordingly, the company is expected to continue to be an important Value Builder.
Valmont Industries’ current Price Target of $303 represents a +33% change from the current price of $227.00.
This neutral appreciation potential results in an appreciation score of 49 (51% of the universe has greater appreciation potential.)
With this neutral Appreciation Score of 49, the low Power Rating of 25 results in an Value Trend Rating of D.
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Valmont Industries’ current Price Target is $303 (+19% from the 2022 Target of $254 and +33% from the 02/21/24 price of $227.00). This slight rise in the Target is the result of a +21% increase in the equity base and a -2% decrease in the price/equity multiple. One Driver has a positive impact on the price/equity multiple, one has a negative impact, and one has no effect. The forecasted increase in return on equity has a large positive impact on the price/equity multiple. The forecasted flat growth has no impact. The forecasted increase in cost of equity has a large negative impact.
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PTR’s return on equity forecast is 17.0% — slightly above our recent forecasts. Forecasted return on equity exhibited a slight, erratic decline between 2014 and 2022. The current forecast is steady at the 2014 peak of 17%.

PTR’s growth forecast is 13.0% — substantially above our recent forecasts. Forecasted growth exhibited a modest, erratic increase between 2014 and 2022. The current forecast is significantly above the 2018 low of 0%.

PTR’s cost of equity forecast is 10.3% — in line with recent levels. Forecasted cost of equity exhibited a slight, erratic increase between 2014 and 2022. The current forecast is above the 2017 low of 7.1%.
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At Valmont Industries’ current price of $227.00, investors are placing a positive value of $64 on its future investments. This view is consistent with the company’s most recent performance that reflected a growth rate of 13.0% per year, and a return on equity of 16.0% versus a cost of equity of 9.6%.
PTR’s 2024 Price Target of $303 is based on these forecasts and reflects an estimated value of existing assets of $150 and a value of future investments of $152.

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