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Titan Machinery: Simply Risky
Posted by: Henry Tan (IP Logged)
Date: October 24, 2012 09:41AM

A common strategy utilized by value investors across the board is to seek equities that represent the three Us: under-recognized, underappreciated and undervalued by the Street. After all, with respect to history, what can go wrong when everyone jumps on the bandwagon?

One dynamic sector to keep an eye upon is the agriculture sector, which has largely fallen out of favor due to a prolonged drought. One of the more minor cogs of the sector, Titan Machinery (TITN), is engaged in the retail operation and service of heavy agriculture and construction equipment. Based upon current conditions, investments in TITN should be staved off until a fundamental operational restructuring occurs, lest one should fall into a value trap.

At its very core, Titan Machinery sells and leases heavy machinery to its clients. Complimenting this model is its vertically integrated capability of offering both maintenance services and machinery parts to its clients. This full-service strategy is oriented towards "substantial cross-selling opportunities" and is diversified enough to allow them to "operate effectively throughout economic cycles." Titan Machinery has been in operation for 32 years, with 110 stores as of July, with its IPO in 2008. Its business model is primarily divided into two segments: agriculture and construction. Furthermore, each business segment derives its revenues from four categorical operations, respectively:

a. New and used equipment sales

b. Parts sales

c. Service and maintained

d. Equipment rental

In the second quarter of 2012, Titan Machinery posted revenues of approximately $394.53 million, with a net income of $5.21 million. The firm trades at a relatively low P/E of 10.66, with a tangible book value of $15.37. To be concise, the firm is trading at a premium of approximately 40% from its TBVS. In terms of free cash flow, there is none, as it was negative for the fiscal years ending in January between 2009 and 2012. Currently, Titan Machinery does not pay a dividend. Qualitatively speaking, Titan Machinery is quite aggressive in terms of acquisitions of storefronts, with acquisitions alone contributing $55.5 million to revenues for the second quarter. Since 2003, the firm has completed 45 acquisitions which yielded approximately 99 storefronts. However, what catches the eye is the fact that much of the new parts and equipment sold is derived from one supplier, CNH Global (CNH). While goodwill is certainly established between the two firms, it is still too risky to rely upon one supplier for all goods. After all, when one looks at the rocky relationship betweenWalmart (WMT) and its numerous suppliers, one should hesitate to invest in firms overly reliant upon a single economic partner.





As seen in the previous charts, on a quarterly basis from second quarter 2011 to second quarter of 2012, several issues of pressing concern emerges. While sales increased by 31% from second quarter 2011, inventory also bloated by approximately 50%. In fact, inventory comprises 82% of all current assets in the firm, which narrows the margin of safety considerably in liquidation events. Furthermore, for the same time period, long-term debt increased by 480% from $31.93 million to $185.23 million. EBITDA / EBIT margins remained relatively stable, though they trended slightly downward, as did ROE and ROA. In terms of the bottom line, Titan Machinery's razor-thin profit margins were further trimmed from 2.03% to 1.27%. It should be noted that notes payable currently stands at $707 million, though it was stated in their annual report that 48% of their notes at the time were non-interesting bearing. However, for those considered part of the normal notes payable, interest rates range from 2.25% to 7.2%.





Compared against a selected basket of firms in the same industry, Titan Machinery underperforms on several metrics. Generally speaking, the firm's razor-thin profit margin is something to be desired, as is its liquidity, especially when one subtracts inventories. In terms of multiples, Titan Machinery actually trades at lower ones than the basket. Enterprise multiples are actually quite low, but the value investor does not simply buy the firm based on multiples, but as a whole.



Utilizing Bruce Greenwald's Earning Power Valuation Model, the following valuations were rendered. As seen in the table above, any discount rate above 2.5% essentially erodes any margin of safety for the firm.

GuruFocus' data of both Guru holdings and insider buys/sells paints the same negative picture. There are no Gurus holding TITN, and activity by company officers were large scale sell-offs, which signify a general lack of confidence.

Titan Machinery is quite young, in terms of trading on the public markets, and is essentially a small-cap company. However, as a whole, Titan Machinery bears a great deal of risk. There is no free cash flow, a over-reliance upon one main supplier and a rather bloated inventory. Debt levels are currently manageable, but the firm is largely illiquid. And when compared with those in the industry, it underperforms on numerous metrics. As such, any large-scale investment in Titan Machinery is largely the buyer's risk and as such, it is recommended that an investment into TITN be staved off until further notice.


Stocks Discussed: TITN, CNH, WMT,
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Rating: 3.2/5 (15 votes)



Titan Machinery Simply Risky
Posted by: brazzer (IP Logged)
Date: October 24, 2012 02:45PM

The lack of free cash flow can be explained by their heavy investment in excess inventory to support their growth. Titan machinery has a huge secular opportunity for growth by acquiring mom and pop shops at very low multiples, integrating them into their network and making them more efficient.

We hold a significant position in Titan machinery that we acquired at a price much higher than the current market price, We have visited the stores, spoken to managers, employees and executives.

We feel very good about the long term prospects of our investment. We see the current drought as a buying opportunity since it is depressing the earnings. Once those short term pressures become subdued and the earning power is in display we believe the market will revalue this company at a much higher level.

Titan has never traded at such a low price to book ratio without subsequently rebounding significantly. Also the inventory is not fashion stuff or tech goods that can be written down significantly, it is heavy machinery which holds its value thru the years.

Our conversations with interested parties has yielded us to believe that people buy from Titan because they take care of their costumers extremely well and provide far superior service than anybody else in the industry; We thus believe that they reliance on CNH is more of a problem for CNH than it is for Titan. What stops Titan from selling something else in their stores, given that the costumers are loyal to Titan more than they are loyal to CNH?


Stocks Discussed: TITN, CNH, WMT,
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Rating: 2.5/5 (2 votes)



Titan Machinery Simply Risky
Posted by: rgarga (IP Logged)
Date: October 24, 2012 10:24PM

I agree with assessment from Brazzer. Thus bought a small position recently. What really bothers me an increasing short position with above 20% short. I always feel like they may know some or understand some that i dont know.


Stocks Discussed: TITN, CNH, WMT,
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Rating: 1.0/5 (1 vote)





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