Fitch upgrades Valmont’s rating to ’BBB’ with stable outlook

Investing.com -- Fitch Ratings has elevated the Long-Term Issuer Default Rating (IDR) and senior unsecured revolver and notes of Valmont Industries Inc . (NYSE:VMI) to ’BBB’ from ’BBB-’, maintaining a stable outlook for the company.

The upgrade is a reflection of Valmont’s conservative financial strategy, enhanced financial flexibility, and an improving operating profile. The company’s credit profile has seen benefits from strong market positions, diverse end-markets, and a product mix that aligns with electrification, sustainability, and infrastructure investment trends. However, the rating is limited by the company’s exposure to cyclical end-markets and susceptibility to fluctuating crop prices.

Fitch’s stable outlook is based on the expectation that excess cash flow will be evenly allocated toward growth and shareholder returns, while keeping EBITDA leverage under 2.0x, in line with ’BBB’ rating tolerances.

Despite a contraction in revenue over the past two years, particularly in the agriculture and telecommunication end-markets, Valmont has been able to expand its margins. Fitch anticipates that through pricing actions, improved cost structure, a more favorable sales mix, and increased aftermarket sales, Valmont will continue to expand its margins. Consequently, Fitch projects EBITDA margins to exceed 16% by 2027.

Fitch also expects Valmont to generate strong free cash flow (FCF) before dividends of about $200 million annually, even with increased capital expenditure investments aimed at improving efficiency and adding demand-driven production capacity. The company’s financial flexibility is further bolstered by low refinancing risk, with no significant near-term maturities until 2044.

Valmont serves diverse end-markets, including agriculture, utilities, telecommunication, and general industrials, which helps to mitigate the cyclicality inherent in short-cycle diversified industrials. While the company’s agriculture segment has been impacted by low crop prices and uncertain trade policies, the infrastructure segment remains resilient due to increasing power needs and normalized telecom spending.

Fitch expects Valmont to benefit from secular growth related to the energy transition, aging infrastructure, and digitization, despite trade policy uncertainties. These trends should support margin expansion and accelerate replacement cycles, potentially reducing sensitivity to business cycles.

Valmont’s strong market position is supported by its well-established distribution network and long-term customer relationships, which enables the company to defend margins through cycles. The company has implemented cost actions that are expected to fully offset the impact of tariffs on EBITDA by the end of 2025.

Fitch views Valmont’s capital allocation priorities as well-balanced and consistent with a solid balance sheet. The company’s management aims to evenly allocate operating cash flow between organic/inorganic growth and shareholder returns, with a long-term net leverage target of 2.5x or below.

Valmont’s ratings reflect its exposure to cyclical end-markets, similar to diversified companies such as Kennametal (NYSE:KMT) Inc. (BBB/Stable), Teledyne Technologies Inc (NYSE:TDY). (BBB/Stable), and Allegion (NYSE:ALLE) plc (BBB/Stable). However, Valmont has a lower exposure to recurring revenue and weaker margins than Teledyne and Allegion, but this is mitigated by significantly lower leverage than these peers.

Fitch’s key assumptions include a decline in revenue in the low-single digits in 2025, followed by growth in the low-single digits thereafter, gradual improvement in margins, and elevated capital expenditure at 3.5% of annual revenue in 2026 and beyond. It is also assumed that dividends will grow over the long term and excess cash will be evenly directed between growth and shareholder returns.

Fitch notes that a downgrade could occur if EBITDA margins consistently decline to the low-teens, FCF margin stays below 2%, aggressive cash deployment leads to reduced financial flexibility, or EBITDA leverage stays above 2.2x. On the other hand, an upgrade could result from higher technology content and effective cost controls supporting EBITDA margins in the high-teens, growth of recurring revenue, and a credit-conscious capital allocation policy that prioritizes a strong balance sheet leading to gross EBITDA leverage sustained below 1.7x.

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