Titan – Is it Really Moving the World?

Madhuchhanda is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The leader in tire manufacturing, Titan Inc. has faced its ups and downs. But despite everything, it has persevered, moving on to occupy a well-respected position in the global market. Let us take a more careful look at the company.

Titan originally started its business, as the "Titan Tire Corporation” in 1993, manufacturing only various off-the-road tires. They continued expanding their product offering and reach by purchasing the off-road tire assets of Pirelli Armstrong Tire Corporation in 1994. The Titan Tire Corporation was split off as a subsidiary of Titan International (NYSE: TWI) in 1997.

Titan International is now a leading manufacturer of tires and wheels for the off-road industry. In particular, Titan operates in the agricultural sector (64% of last year's revenue), earthmoving and construction sector (21%), and the consumer sector (15%).

On April 1st 2011, the company acquired Goodyear Latin American farm tire business and began to manufacture its product in Sao Paolo, Brazil. Excluding this acquisition, revenue in the agricultural sector grew at 15.6% annually since 2006. The company's operating margin has expanded from 6.5% to 16.48% from 2006 to 2011 as a result of better utilization rates, and increased efficiency as the company gains experience.

But what about the current fiscal year? Is Titan still the world leader it proclaims to be? Let us take a look…

What Titan has to offer
With a network of dealers all over the world, Titan is a global brand that original equipment manufacturer and operators can count on for durable products and quality service. You can’t go wrong with Titan - the only company who designs, tests and manufacture tires and wheels for Agriculture, Construction, Forestry and Mining.

Here’s a look at the different segment the brand rules:

Agriculture:  Today Titan controls 75% of the market for North American off-the-road farm wheels and 40% of the market for OTR tires. Agriculture accounts for 64% of revenue and nearly 80% of profit, which means the company is highly levered to agricultural-commodities prices. The company sells a variety of wheel and tire assemblies directly to farmers, and through distributors and equipment dealers. 

Looking ahead, Titan is poised to take advantage of the economics of the industry. Agriculture will remain a cornerstone of our economy. As long as tires are made primarily of rubber, they will wear down, ensuring a cycle of replacement. A major trend in the agricultural market is the rise of genetically modified crops. While these crops have been positive for the industry, crops have become sturdier, making traditional tires more prone to puncture. Traditional tires' lives can have been cut by 1/3. Titan has seized on this trend, and produced new tires with Kevlar to improve the durability of these tires.

Earthmoving and Construction: This segment is too on the rise. Though this market is more volatile than the agricultural market, it is profitable nonetheless. Revenue in this area has grown on average at 15.27% annually from 2006 to 2012, with operating margin in this segment rising from 11.91% to 17.63%.

Consumer: Consumer is the smallest segment of the company with the smallest operating margins. Titan's technology and ability to produce combined tire and wheel assemblies puts it in a good position, but this industry will not be driving the fortunes of the company.

All in all, it looks pretty good.

Risk Factors
The main concern for the company is increased competition, and substitute products. Recent Q2 results put Titan ahead of the race, with investors enticed by the profits. But with competitors like Bridgestone, Hankook, Cooper or Carlisle Companies, rearing their heads, is the company poised for the challenge? Let us see.

Japanese Giant Bridgestone (NASDAQOTH: BRDCY) is now forecasting an increase in revenue of 3.5% in 2012 compared to 2011 and an increase in operating profit of 50% for 2012 compared to 2011. For the year as a whole the operating profit margin is likely to hit 9.2%, which is a substantial improvement over the 7.4% OPM of 2007 and by far the best figure of the past decade.

Similar results are given by Michelin (NASDAQOTH: MGDDF) as the Premium Tire Manufacturer announced its global financial results for the first half of 2012 with revenues of €1,320 million in operating income before non-recurring items, to be up 36% from 2011, signifying high reliability and good management. Confident in its strengths, Michelin confirms its full-year objective of reporting a clear increase in operating income before non-recurring items. 

Cooper Tires, Michelin, Dunlop and several others also reported a net rise in their income. 

But it seems Titan isn’t too worried. The company has 3 facilities which could be converted to production facilities. Additionally, the company has consistently been able to pass along increases in commodity prices to consumers in both the agricultural and earthmoving and construction sectors. This actually debunks the myth that the company relies on too few customers. Things aren’t expected to go south any time soon, but even if they do, the company has both reputation and quality to fall back upon.

Conclusion
Titan International appears to be well positioned to continue its strong history of growth due to intrinsic and industry factors, in spite of possible headwinds from competition. The company may be small, but its tires and wheels are mighty—and mighty popular with farmers, miners and construction firms. I don’t think investors will have to worry about this company any time soon.

 


Madhu60 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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