Editor's Choice

4 Titanic Questions

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

Titan International Inc. (NYSE: TWI) is a U.S.-based manufacturer of wheels and tires in three segments: earthmoving/construction/mining, agricultural and consumer. The company has lost about 30% of its value since the spring, and had a rough third quarter when production at one of its main U.S. plants fell far short of orders—a problem officials blamed on a new IT system and attributed to tens of millions in lost sales.

Since announcing 3Q12 results in October, the company has begun integrating two major acquisitions, replaced a top sales executive, and battled questions that are being raised about the short-term strength of several of its key end markets. Nonetheless, some on Wall Street are feeling better about Titan than they have in months and are betting that the tough times of the past year are now behind it—underscored by overall option volume this week that’s been far above the stock’s daily average and turned increasingly bullish.

With a little less than two-thirds of the current period to go before its 4Q12 earnings report is issued on Feb. 18, here are 4 Titanic Questions that anyone interested in TWI stock should endeavor to answer.

Question #1 — Have they got their IT issues ironed out? Titan’s plant in Bryan, Ohio, is the primary producer of its giant mining tires and some agriculture tires, and as testament to its importance it was chosen as the first facility in which a new computer system would be installed in order to move from manual to automated solutions.

After 18 months and millions of dollars spent on hardware and training, the system totally failed during Q3 and the plant was unable to produce and ship all of the orders it received. Company officials said they are confident the glitches are being repaired and the system should be working effectively going forward. The fix is costing them between $1 million and $1.5 million in additional IT costs each quarter, however, and proof of the improvement must be seen before the company starts rolling the system out to other facilities as planned.

Question #2 — How are their end markets faring? TWI’s earthmoving/construction/mining segment is its biggest profit center, and sales grew 27% in Q3. However, since then two major players in the heavy equipment space—Caterpillar Inc. (NYSE: CAT) and Cummins Inc. (NYSE: CMI)—lowered earnings and revenue guidance due to weakening demand in the category. On the agriculture side, sentiment in North America had dropped significantly over the summer as drought conditions spread, but seemed to pick up as the summer ended. Deere & Co. (NYSE: DE), the world’s largest manufacturer of farm equipment, said in its FY4Q12 earnings report on Nov. 21 that the period and year were its best ever in terms of sales and earnings, but it noted “big economic challenges today ranging from the U.S. fiscal cliff possibilities to euro debt crisis and the slowdown in emerging market economies” were reason for short-term caution. The company’s consumer market, which includes products for all-terrain vehicles and recreational/utility trailers, could also be at risk from these economic headwinds.

Question #3 — Are recent acquisitions integrating well? TWI made two big deals in recent months that could reap big dividends—or cause big headaches. In the first, they purchased a 56% controlling interest in Australia’s Planet Corporation Group. This expands the company’s presence in this key mining country, but was responsible for negative net income in Q3 and will likely not contribute to EBTIDA or EPS through at least the end of the year. The second deal was even bigger but also could present even bigger challenges: TWI completed its 100% acquisition of Titan Europe Plc in October. How quickly and efficiently U.S.-based management can merge this once public overseas company with the parent firm will be key to the deal’s ability to contribute to Titan’s bottom line.

Question #4 — Will the new sales head make a difference? In early November, Richard Rose joined TWI as its VP of Sales and Marketing. In the past Rose has worked with large manufacturing companies including AGCO Corp. (NYSE: AGCO), a manufacturer and distributor of agricultural equipment that is a long-time TWI customer. Rose is seen as a potentially strong player in the aftermarket sales and service segment, which most analysts believe will become increasingly important if new heavy equipment and farm machinery sales slow. His predecessor was stronger in original equipment sales.

Conclusion

TWI is in a tough business. Quality tires are not easy to manufacture properly and efficiently, and sales are particularly dependent on external factors and macro economic trends—not to mention the unusual forces like raw material costs, labor issues and the like. Nonetheless, Titan has always attracted a great deal of investor interest because the business offers the opportunity for high margins and it still manufactures much of its primary product in the United States. The next two months will offer clear evidence of whether the above questions are being answered positively, and whether the results can help Titan pull out of its current decline.


Fool blogger Howard Rothman does not own shares in any of the companies mentioned in this entry. The Motley Fool owns shares of Cummins. Motley Fool newsletter services recommend Cummins. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus

Compare Brokers

Fool Disclosure