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Valmont to Gain from Restructuring Actions Amid Challenges

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On Nov 20, we issued an updated research report on steel pipe and tube company Valmont Industries (VMI - Free Report) .

Valmont’s revenues and profit for the third quarter of 2015 tumbled year over year on weakness across its businesses. Adjusted earnings matched the Zacks Consensus Estimate while sales missed expectations. The company expects challenging operating conditions to persist in the near future. However, Valmont is optimistic about a significant improvement in its earnings in 2016.

While Valmont's long-term growth story remains intact, it faces certain near-term challenges across its operations. The company is seeing continued challenges in its irrigation business due to weak commodity pricing and large crop inventories.

The results in the company’s North American irrigation business are expected to continue to be affected by lower commodity prices which are affecting farm income. Lower farm income, in turn, is expected to impact equipment purchases by farmers.

Valmont is also seeing challenges in its North American utility structures business, partly due to weak pricing and absence of larger projects. Market conditions for this business are not expected to materially improve in the near term.

Moreover, reduced investment in oil and gas infrastructure due to lower oil prices and a weak mining industry in Australia are expected to hurt its Engineered Infrastructure Products Segment through the balance of 2015. A weak Australian economy is also affecting its Coatings segment.

Nevertheless, Valmont should gain from restructuring actions, acquisitions and its efforts to boost its market position through investments towards developing its product line. Its long-term prospects look healthy despite a few near-term headwinds.

Valmont should benefit from its restructuring actions that were announced in April 2015. Most of the restructuring activities are taking place in the company’s Infrastructure business.

The restructuring will allow Valmont to not only consolidate its operations, but also keep up its customer service, thus maintaining its position in the market. These actions are expected to improve the company’s overall cost structure, thereby supporting its earnings. The company now expects annual cost savings from restructuring and other cost reduction actions to be around $30 million, up from $19 million expected earlier.

Acquisitions will also support growth. The acquisition of leading Northern European engineered steel products maker – DS-SM A/S (rechristened Valmont SM A/S) – has enabled Valmont to cater to a wide range of industries. Moreover, the acquisition of a majority stake in South Dakota-based AgSense has broadened Valmont’s portfolio in remote monitoring and control technology for agriculture. The purchase of American Galvanizing Company, a market leader in hot-dip galvanizing in the Northeast U.S., also expanded Valmont Coatings' network to 33 facilities in 6 countries around the world.

Valmont currently sports a Zacks Rank #3 (Hold).

Stocks to Consider

Some better-ranked companies in the steel and metals space include NSK Ltd. , Worthington Industries, Inc. (WOR - Free Report) and Norsk Hydro ASA (NHYDY - Free Report) . All of them carry a Zacks Rank #2 (Buy).

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