To say we are in a market of historical dislocations is to state the obvious these days. Scandals, bailouts, failures and survivals top the headlines every day.

However, if you look past the headlines to the myriad other companies not making the front covers, you find some intriguing valuations. Some are overpriced with too high expectations; others are written off as finished before their time. Look behind the headlines for companies tied into those businesses.

Take, for example, Worthington Industries (WOR), a steel producer based in the U.S. with more than $3 billion in annual sales. More than 26% of Worthington’s steel sales are tied to automotive sector, with 15% of total sales coming from the Big Three alone. So when Chrysler said that it is closing 30 of its factories for at least one month starting at the end of this week, you have to think that Worthington’s sales and profit margins are getting killed. No wonder the company is closing down factories, writing down the value of assets and firing workers.

On Thursday, Worthington said it lost $159.5 million, or $2.02 a share, for the quarter ended Nov. 30, vs. a profit of $14.7 million, or 18 cents a share, a year earlier.

Worthington’s CEO John McConnell said: “We anticipated a softening in our markets and some headwinds as we entered the second quarter, but no one predicted the financial collapse that contributed to a massive and swift decline in steel prices and demand.”

For full-year 2008, Worthington sold $1.5 billion worth of processed steel, with operating income of just $57 million, which equates to just 3.9% of total sales. EBITDA for the processed steel business has been relatively flat since 2006, at $85 million dollars for the past three years or so. Metal framing earned $789 million, with an operating loss of $7 million. This business is highly dependent on the spot price of steel and has seen declining EBITDA since 2006 at $63 million to just $10 million in 2008.

Shares of Worthington, which closed down 10% or so after the company reported that horrific quarter, trade with a current P/E of 6.3, which is slightly above the industry average of 4.47%. Operating margins are 5.9% firm-wide, which is below the industry average of 14.4%, and gross margins are 13.3%, which is below the industry average of 21.1%.

Astute investors shorted shares of Worthington ahead of its quarter, based on the company’s hidden economic exposure to the auto sector.

During the summer, everyone was raving about everything agriculture-related. Behind the farmers and their tractors look at Lindsay (LNN), an irrigation equipment maker.

Despite the recent weakness from Deere (DE) and Cummins (CMI) regarding the economy outlook of the farming sector, Lindsay’s fiscal first-quarter profit rose 45%. For the three months ended Nov. 30, net income rose to $6.3 million, or 51 cents per share, compared with $4.4 million, or 36 cents per share, in the year-earlier period.

Operating income for Lindsay has grown from just $16 million in 2003 to more than $62 million, with a compounded annual growth rate of 20% for the five-year period. In total, for full-year 2008, revenues are up $475 million, compared with just $282 million in 2007. That’s an increase of more than 65% in a single year. Domestic irrigation revenue of $239 million is up 63% from 2007, international irrigation revenue of $136 million is up 95%, and infrastructure revenue of $100 million is up 53%.

More important, gross margins improved to 26.1% from 24.7% from last year. Operating costs dropped from 16.3% in 2007 to 13% in 2008. This is due mostly to the decline in steel prices, which is what hurt shares of Worthington on Thursday.


Interestingly enough, Lindsay has a very strong highway safety business, which fits right into President-elect Obama’s infrastructure plan. Here revenues have gone from just $12.1 million in 2003 to more than $100.2 million in 2008 with operating income of $1.2 million in 2003 to over $16.7 million in 2008.

With everyone trying to game shares of General Motors (GM), Ford (F), Deere and Potash (POT), read behind the headlines and you might find some interesting ideas.

Posted on Dec. 19, 2008