Higher Commodity Prices Increase Demand for Irrigation Equipment

May 31, 2011

The demand for irrigation equipment is increasing along with food prices, with farmers reaping a faster return on their investments in such technology as center-pivot irrigation and remote monitoring, says C. Schon Williams, Vice President and Senior Equity Research Analyst at BB&T Capital Markets.

High commodity prices have increased the return on investment for machinery and dramatically shortened the breakeven period,” Williams said. “Farmers see where corn, wheat and soybean prices are and are rushing out to buy agricultural machinery so that they can reap the benefit of the higher commodity prices.”

Williams points to Valmont Industries (VMI) as one of his favorite irrigation equipment companies. He says Valmont is trading at reasonable multiples, its irrigation equipment is one of the favorites among end users and the Energy Policy Act of 2005 benefits its utility-transmission business.

“We have a $130 price target on [Valmont], which would yield 20%, 25% upside from today,” Williams said. “They are doing very well in that irrigation market, and then you’ve got a couple of other catalysts including electrical transmission and a recent acquisition that are due to kick in here over the six to 12 months that should provide some additional upside.”