Valmont’s stock performance underperformed the S&P 500 index as its profitability trimmed during those period from late 1990 to early 1993. With respect to the contemporary market contest, Valmont underwent an $8 million operating loss in 1991. Meanwhile, growth in irrigated acreage in the United States had come to a halt due to recession. It is understandable that analyst prefer not to favor a loss-making firm in a degenerative industry. We calculated the EVA for each division of Valmont and here are the Assumptions:
1. WACC=10%, tax= 35%, 2. Net Asset for 1993, take average of previous year’s net asset over sales, 3. Add 1991 restructuring cost back to the profit. (Exhibits 1, 2, 5) The Industrial division consists of Construction Products and Valmont Electric. The EVA for Construction Products was positive for the 4 years we analyzed while Valmont Electric EVA was negative. The negative EVA for Valmont Electric was largely due to the recession but it is showing a growing trend
after restructuring in 1991 and we expect positive outlook for Valmont Electric in the future. Therefore, we are bullish about Total EVA for the next few years. For the EVA of irrigation division, it has maintained a positive number even in the worst year and has showed a growing trend. As Irrigation Division’s EVA was highest among Valmont’s segments, the management team might consider to expand the Irrigation segment. Valmont accumulated all of its overheads expense to the corporate segment.
For EVA computation purpose, we decided to reallocate this part to operating units and to analyze the results. We adjusted corporate overhead expenses based on each unit’s sales. (Exhibit 3) Since we allocated corporate costs and net assets to each business divisions, the operating profits dropped but net assets increased, resulting in decrease in total EVA. After the reallocation, EVA for industrial segments became negative while EVA for irrigation segments remained positive.