Titan International: Still A Solid Opportunity Heading Into Earnings (NYSE:TWI)

One of the most beautiful things about value investing is that, even when fundamental conditions for a business are worsening, that business can still make sense to buy into. If you can buy shares at a cheap enough price, upside can be rather significant. Although I never bought shares in this particular player, one firm that I did rate a ‘buy’ that has turned out in a positive way in recent months is Titan International (NYSE:TWI). Since I last reiterated my ‘buy’ rating on the stock in September of 2023, shares have seen upside of 20.4%. That’s almost double the 11.8% seen by the S&P 500 over the same timeframe.

This kind of movement is definitely positive. But you would not have imagined that shares would have experienced this kind of outperformance if you were looking solely at the fundamental condition of the business. Revenue, profits, and cash flows, have all worsened year over year. Furthermore, analysts are forecasting that revenue and profits will also worsen for the data covering the final quarter of the 2024 fiscal year that management is going to report after the market closes on February 28th. In spite of this, shares remained cheap enough and the company remains of a high enough quality to justify continued upside from this point on. So, because of that, I have decided to keep the business rated a ‘buy’ for now.

This tractor can still move

For those not aware, Titan International it’s an enterprise that’s focused on producing and selling wheel, tire, and undercarriage industrial equipment, as well as other similar offerings. About 50% of its revenue comes from tires, while another 25% involves wheels. The last 25% involves carriage related offerings. By and large, the company focuses on the agricultural market, which is where 55% of its revenue comes from. The earth moving and construction category accounts for another 37% of sales, while the consumer market comprises about 8%. Given the nature of the business, it shouldn’t be surprising to know that about 65% of overall revenue can be chalked up to original equipment manufacturers as the buyer. But a hefty 35% of its products are sold on the aftermarket.

Fundamentally speaking, things have not been going particularly well for the firm. During the third quarter of the 2023 fiscal year, which is the most recent quarter for which we have data available, revenue came in at $401.8 million. That’s 24.3% lower than the $530.7 million generated one year earlier. All three of the companies operating segments suffered during this time. Original equipment manufacturers were particularly impacted because of elevated inventory levels, which was a problem that was most present in the Americas.

The segment of the business that was most impacted was the Agricultural segment. Revenue under that unit plummeted 26.4% from $289.3 million to $213 million. Lower sales volumes in North and South America were driven by the decision of consumers to reduce elevated inventory levels of agricultural equipment. To make matters worse, the softness in the market caused prices to fall and an unfavorable change in product mix that also impacted the business. This is not surprising to me after having looked at net cash farm income data and projections. According to the USDA’s Economic Research Service, Net cash farm income hit $202.3 billion in 2022. In 2023, it plummeted to $160.4 billion. You would think that a mass of one year decline is the most that we would experience. However, this metric is forecasted to fall further to $121.7 billion this year.

*$ in Billions

Some of this weakness will be driven by a decline in cash receipts from $536.6 billion to $485.5 billion. But some of the pain on the bottom line seems to be attributable to a rise in costs. Cash expenses are forecasted to grow from $402.2 billion to $428 billion. To be clear, the balance sheets of the farming sector in the US, where Titan International it gets about 49% of its revenue, will see the balance of machinery and motor vehicles grow from $344 billion to $383.4 billion over this time. This means that the companies in this space will continue expanding. But between net cash income declining, and total farm debt projected to rise from $496.1 billion to $547.6 billion, it’s likely that 2024 will be another disappointing year from an agricultural perspective.

The Earthmoving/Construction segment of the company also experienced a great deal of pain. Revenue for that segment dropped 22.4% year over year from $199.9 million to $155 million. This drop, according to management, was driven largely by a decrease in volume in the Americas, with the undercarriage business leading the way because of elevated customer inventory levels and a reduction in demand for certain construction related offerings from original equipment manufacturers. And just as was the case with agricultural products, prices dipped year over year. High interest rates, worries about demand because of economic conditions, and other factors, are likely contributing to this pain as well.

On the bottom line, the picture for the firm also has worsened. Net income dropped from $43.2 million to $19.3 million. This is to be expected for an asset intensive industry with margins that could be better. Unfortunately, other profitability metrics followed suit. Operating cash flow went from $53.3 million to $51.2 million. Although this seems small, when we adjust for changes in working capital, we get a massive decline from $43.5 million to $24.6 million. Meanwhile, EBITDA for the company dropped from $61.2 million to $40.5 million. In the chart above, you can see financial results for the first nine months of 2023 relative to the same time of 2022. As was the case in the third quarter, results for the first nine months of the year came in materially worse in almost every instance than they were the same time of 2022.

There is always an opportunity that the picture could improve. But I doubt that it will be terribly soon for the reasons already discussed. Analysts, for their part, believe that revenue for the final quarter of the 2023 fiscal year will have totaled $418.1 million. That would be a rather sizable decline from the $509.8 million reported the same time one year earlier. Earnings per share, meanwhile, are expected to be around $0.28. This would be quite a bit lower than the $0.66 per share reported for the final quarter of 2022. As a result, net profits are forecasted to fall from $42 million to $17.7 million. Analysts have not provided guidance when it comes to other profitability metrics. But in the table above, you can see what those looked like for the final quarter of 2022. In all likelihood, the data for 2023 will be worse.

One really good thing about Titan International is that management has provided a good deal of guidance for 2023 in its entirety. They believe that revenue will come in somewhere between $1.85 billion and $1.90 billion. At the midpoint, that would imply sales of $443.4 million for the final quarter of the year. They did not provide any guidance when it comes to net profits. But they did say that EBITDA should be between $200 million and $210 million. Their guidance also allows us to get a good approximation for operating cash flow of between $165 million and $180 million. If we take analysts forecasts for earnings, we would expect profits for the year to be roughly $99 million.

Taking this $99 million figure and also taking the midpoint of guidance when it comes to the other profitability metrics that management gave, I was able to value the company as shown in the chart above. Even with the condition of the firm worsening, shares are still trading in the mid to high single digit range. I then compared the firm to five similar companies in the table below. When it comes to the price to earnings approach, two of the five businesses were cheaper than our prospect. However, Titan International did end up being the cheapest of the group when it comes to the price to operating cash flow approach, and it is tied as the cheapest when it involves the EV to EBITDA approach.

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Takeaway

Earnings can always be an exciting time for investors. Sometimes it goes really well, other times it doesn’t. I guess an appropriate analogy here is that sometimes you’re the grass and other times you’re the lawn mower. In all likelihood, the picture for the final quarter of this year will be disappointing when it comes to Titan International, though when the market is pessimistic, I believe that’s when it is most likely that there could be a positive surprise. But only time will tell. Long term, the company operates in a space that the world cannot do without. Eventually, the market will recover and, in the meantime, shares look very cheap. This is true on both an absolute basis and relative to similar firms. Due to these factors, I feel very comfortable keeping the company rated a ‘buy’ for now.