What Makes This Stock a Definite Grab at Current Price

By Neha Chamaria - September 11, 2012 | Tickers: AGCO, CAT, CNH, DE, TITN | 0 Comments

• Email
• Print

Some stocks just have ill-luck following them everywhere. If Mr. Market pounded Titan Machinery’s (NASDAQ: TITN) stock after its first-quarter results, the second quarter wasn’t any better – its shares lost a massive 22% in a single day.

I am not going to waste time trying to comprehend why the markets reacted this way, but what I know is this – the huge drop has popped up a great opportunity for investors. Read, and decide for yourself if Titan’s worth your money.

• Top-class growth - Despite tough conditions, Titan’s revenue has grown pretty steadily in the past two quarters – 32.5% in the first quarter and 32% during the second quarter, both compared to the respective year-ago periods. The more important metric, same-store sales, grew as well. Titan’s second-quarter and first six months same-store sales were up an impressive 14.5% and 15.1%, respectively.
  What you should note is this – the company has left its earlier full-year revenue guidance unchanged, estimating it to be in the range of $1.95 billion to $2.1 billion. Even at the lower end, it will be much higher than last year’s full-year revenue of $1.66 billion, which isn’t bad at all. Also, revenue continues to grow alongside inventory, which ensures Titan can maintain an inventory turnover ratio well above 2 times.

• Excellent support - If agriculture is lying low right now, Titan also deals in another segment that’s roaring – construction equipment. Accounting for 22% of the company’s total second-quarter revenue, sales from this segment surged a whopping 59% from the year-ago period. Same-store sales were up 33%. This division will likely be a big driver for Titan should agriculture equipment sales slow down in the forthcoming months, more so because the company gets most of its sales from the U.S. construction market, which is picking up fast. As was seen in the case of construction-equipment king Caterpillar’s (NYSE: CAT) last quarter, while sales in most global markets were flat or down, it was North America that drove up its construction division sales by 8%. The company furthers expects the market to remain buoyant. North America was also the fastest-growing market for AGCO (NYSE: AGCO) during the first six months of the year.

• On steady ground - Titan’s gross margins remain at decent levels despite the headwinds. At around 17% for the second quarter as well as first half of the year, I don’t feel there’s much to complain about. Margins have been a little subdued because of factors such as lower used-equipment sales which are typically high-margin products. I delved into the world’s largest agriculture-equipment maker Deere’s (NYSE: DE) last quarter, and found a similar trend -- sales of used combines were much lower compared to last year. It’s not surprising though, because used equipment are generally preferred by small farmers, who in turn could be cautious in purchasing after the drought. Yet, both Deere and AGCO foresee an uptick in used equipment demand soon.  

• Expanding base – What I like about Titan is the way it is growing bigger and wider. During the last two quarters alone, the company acquired three dealerships each of agriculture and construction equipment in the U.S., and seven agriculture equipment dealerships in Europe. Through these acquisitions, Titan is actually adding more Case IH and New Holland dealerships to its portfolio, both of which are renowned brands of CNH Global (NYSE: CNH). But the move that’s note-worthy is its entry into markets outside the U.S. In its first such expansion outside the home turf, Titan recently opened some stores in Romania. CNH’s widening its global footprint should further open up doors to huge potential markets for Titan.

Since Titan deals mainly in CNH’s equipment, it makes sense to know what CNH expects from the forthcoming months. CNH is not expecting a marked bounce back in the demand for agriculture equipment too soon, and expects a flattish second half. Yet, with CNH’s order books filling up to the fourth quarter, Titan needn’t worry much on the top line front, an observation echoed in its unchanged revenue guidance.

I feel Titan’s lowered full-year earnings guidance should be viewed as the result of macro reasons largely beyond the company’s control. Deere cut its full-year guidance too in the wake of the drought, so why punish Titan so brutally? Maybe Titan is a bit like Deere in this case, which is known for its conservative guidance stand. In its last financial year, Titan topped its own guidance.

Now certainly no one’s expecting another horrendous drought next year, and companies into agri-businesses are hoping to get back to their feet next spring. Know that once things improve (on the weather front encouraging high spring plantations next year), Titan should bounce back. Want an idea of what a good year can do to Titan? It earned nearly twice the net profits last year compared to 2010. I certainly don’t see a reason why Titan should linger at a forward P/E as low as 6.5 times for long. I think this stock could give great returns in the long run.

Interested in More Analysis?

Caterpillar is the market share leader in an industry in which size matters, and its quality products, extensive service network, and unparalleled brand strength combine to give it solid competitive advantages. Read all about Caterpillar's strengths and weaknesses in our brand new report. Just click here to access it now.

• Email
• Print
• Feedback