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A Smart Way to Capitalize on Rising Farm Prices?

September 19, 2012 | About:

Over the past five months shares of Titan Machinery (NASDAQ:TITN) have been hammered by almost 50% by the market.

Titan Machinery is the largest distributor of Case New Holland (CNH) farming machinery in North America. Most investors are familiar with John Deere (DE), but CNH is the No. 2 manufacturer.

The stock has plummeted largely due to drought conditions in the U.S. The U.S. experienced the worst drought in over 50 years. Consequently, small U.S. crops this year meant lower demand for heavy machinery to harvest the weak crops.

Titan experienced a 17% drop in fiscal first-quarter profit last quarter. The company stated that it was the result of “lower used equipment margins as a result of a more competitive pricing environment and the change in sales mix."

Analysts were deeply concerned because it appeared as though small price changes crushed the EPS.

"Minor pricing/margin changes can have a huge impact on TITN’s near-term profitability. We estimate that TITN sold used agriculture equipment at prices about 1.9% lower than typical in the just completed quarter to keep used equipment inventories lean. For example, a used tractor that would have sold for $200,000 prior to 2Q:13 sold for $196,200 in 2Q:13 as TITN sought to lessen its used inventory profile; we believe this accounted for about 30% of the EPS miss."

After the share price dropped, Titan has some impressive valuation metrics. First, TITN earned $2.18 a share last year. Thus, the backward PE is less than 10X. In addition, the company boasts a book value of $15.50. With such a low PE, you would expect that TITN has no growth, but revenues are expected to grow at least 25% over last year’s earnings.

TITN is really a bet on the weather. If the U.S. experiences drought-like conditions again in 2013, the shares could languish. However, if the weather goes back to normal summer conditions, the stock could earn $2.85 per share which would make every value investor take notice.

Rating: 3.4/5 (7 votes)


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GuruFocus has detected 3 Warning Signs with Titan Machinery Inc $TITN.
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