What to Consider Regarding Titan’s Q4

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 (NYSE: TWI) is a U.S.-based manufacturer of wheels and tires in three segments: earthmoving/construction/mining, agricultural, and consumer. It's shares are up just 3.5% over the past year, pummeled by a major downturn that began in early June and hit bottom at the end of September. But since then its shares have risen nearly 44%. Can the momentun continue, or is this just a short-term phenomenon?

Titan's late-year recovery began with release of its third-quarter 2012 results less than a month after its stock hit a 52-week low. In that report, the company said sales rose just 1% year over year, but still set a record. Titan also announced adjusted EPS that beat estimates by $0.03. The company said sales would have been significantly higher if a new IT system hadn’t malfunctioned, causing production at a key U.S. plant to fall far short of orders.

Titan pledged to correct those IT issues during the fourth quarter. It also said it would continue its focus on integrating several new acquisitions, and welcomed a new VP of Sales and Marketing with extensive experience in several needed areas.

As the company prepares to release its fourth-quarter earnings on Feb. 26, here are five things to consider as you ponder how Titan performed at the end of 2012, and where it might be headed over the next several quarters.

1. Farming Remains Strong
This area has been a real ongoing positive for Titan, which produces rims, wheels and tires for tractors, combines, plows, irrigation machinery and other critical farm equipment. Its customers in this segment include the biggest new equipment and aftermarket product dealers in the world, like Deere, AGCO, CNH Global, and Kubota.

Last year was a very strong one for farmers in the U.S. and a couple of other major markets. Titan expects its domestic business to record comparably strong sales in 2013, and projects decent growth in South America and Russia. The only negative it foresees is Europe, which has been weak since the economic downturn.

2. Construction is Rising
Titan anticipates improvement in construction activity in Russia and Brazil, two major emerging markets where it has competitive advantages. This, therefore, could be another big positive. Russia is always a wild card, and many analysts look skeptically at any projections there, but it has been consistent in providing some solid gains in recent periods.

Few doubt that Brazil, on the other hand, will give anything but a big mid-term boost as it continues its build-out for the 2014 World Cup and 2016 Summer Olympics. Many also see viable upward trends in the U.S. construction market, which could gain an even bigger boost if infrastructure repairs become a priority. And more equipment on wheels means more tire sales.

3. Mining is Declining 
This sector could prove problematic for Titan, whose earthmoving/construction/mining division is its most profitable. Sales in the category grew 27% in Q3, but since then, the two biggest companies in the global mining space — Caterpillar (NYSE: CAT) and Joy Global (NYSE: JOY) — have reported a continuing demand deceleration in the category and their 2013 projections are soft at best.

Lower commodity prices, slower China growth and a shaky global economy have all conspired to push down demand. Lower demand ultimately means fewer sales for new and aftermarket mobile equipment, and less tire sales as a result.

4. Growing by Acquisition
This is a short-term unknown that should become a long-term positive. For the past couple of years, Titan has been on an acquisition spree that has favorably altered its geographic and category positions.

In July 2011, it incorporated the Titan Mining Services wholly owned subsidiary, which extended its reach in Chile, Peru, South Africa, Australia and Eastern Canada. In November 2011, the company acquired Goodyear’s Union City tire plant to expand its domestic capacity.

Last August, it acquired 56% of Australia’s Planet Corporation Group to further build its presence in this key mining country. In October, it completed the 100% acquisition of Titan Europe Plc (which had been a related public company doing business on the continent).

The integration of these deals is still under way, and real profitability remains off in the future. Some beneficial signs from them, though, could start appearing as early as this quarter.

5. New Sales Honcho
This personnel shift presents another short-term unknown but likely long-term positive. Last November Titan reached outside the company to tap Richard Rose as its new Vice President of Sales and Marketing. In his 25-year career, Rose previously worked with large industrial firms, including longtime Titan customer AGCO and Knapheide Manufacturing, which produces commercial vehicle bodies. He has expertise in product development, sales force training and acquisition integration, all of which should help Titan. He is also seen as a strong player in the aftermarket sales and service segment, which most analysts believe will become increasingly important going forward. It’s obviously too early to see many real impacts, but an indication of any new initiatives or directions will be interesting.

Conclusion
Even in the best of times, the commercial tire business can be a challenge. It’s not easy to properly and efficiently manufacture the huge, high-quality tires that these industries demand. Sales are heavily dependent on external factors and macro economic trends over which you have no control. Raw material and labor costs are constantly rising. Cheaper newcomers from places like China and Eastern Europe are a growing threat to market share.

But Titan has always attracted active investor interest because its business offers the potential for high margins and it still manufactures most of its primary products within the U.S. Fourth quarter and full-year results should reflect uptrends in farming and construction. Impact from the mining slowdown at this point should not be enough to negate that, and as long as the new acquisitions haven’t proven an unexpected resource drain the quarter and year-end report will likely be positive. Barring changes in the ag or construction trends, long-term performance may be even better.


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