Utility Segment Drives Valmont Profits

Omaha-based metal company Valmont Industries (VMI - Analyst Report) registered higher profits in the second quarter of 2009, driven by commendable results in its Utility Support Structures segment. 

In the quarter, Valmont’s profit increased to $44.2 million or $1.69 per diluted share from $37.3 million or $1.41 per diluted share in the second quarter of 2008. Net sales rose marginally to $498.8 million from $497.1 million in the year-ago quarter. Operating income grew 9.5% to 13.9% of net sales. 

Sales in the Utility Support Structures segment nearly doubled over the year ago level to $199.2 million, contributing the lion’s share (40%) to overall sales. Demand for additional transmission capacity to the electricity grid as well as the grid’s inclination towards averting the risk of service interruption in North America unlocked the growth potential in the segment. 

Operating income in the Utility segment more than trebled to $47.5 million, which was 23.8% of sales. This was triggered by higher fixed cost leverage on increased volumes and falling raw material prices. 

Overall performance in Valmont’s other segments were hindered by the recessionary market conditions. Constrained spending in the infrastructure and irrigation sectors lowered sales in the Engineered Support Structures (4%) and Irrigation (37%) segments, respectively. The frailer industrial sector hampered sales in the Coating segment (23%). 

Valmont foresees a modestly higher 2009 earnings over the year ago level. The company anticipates positive trends in the Utility segment coupled with expected renewal of the U.S. Federal Highway bill in 2009 to impart long-term growth in earnings. However, sales growth in the utility segment is expected to be moderate in the second half of the year due to reduction in backlog. 

In light of the above conditions, we maintain our Hold rating of the stock and raise the six-month target price to $70.00.