Seeking Alpha
Long/short equity, special situations, newsletter provider, social networking
Profile| Send Message|
( followers)  

Summary

  • Total liabilities increased by more than 25% from $1.04 Billion to $1.32 Billion from 1/31/13 to 10/31/13.
  • Titan Machinery has missed its guidance and has had its share price gap down for each of its last four announced earnings reports.
  • Titan has generated negative cash flow from operations in 10 of its last 11 quarters.

The shares of Titan Machinery (TITN) are a "Perfect Short". Shares closed Friday @ $15.49 and I am recommending that its shares be sold short.

The significant and consistent decline in the company's share price and market capitalization over the past 12 months have severely restricted its ability to raise equity capital to reduce its burgeoning liabilities due to its chronic negative Cash Flow from Operations. Total liabilities increased by more than 25% from $1.04 Billion to $1.32 Billion from 1/31/13 to 10/31/13. During the same nine months Titan's market capitalization declined by 40% from $561 million to $336 million.

The business model of Titan Machinery can't be compared to John Deere (DE) , CNH Inc (CNH) or Caterpillar (CAT).
DE,CNH and Cat are manufacturers with their own financing arms, while TITN is nothing more than a reseller.

Titan Machinery has had multiple diagnoses of "The EPS Syndrome" by StockDiagnostics.com which is a website that monitors the Cash Flow from Operations for all publicly traded companies. Titan has generated negative cash flow from operations in 10 of its last 11 quarters. Titan has reported positive EPS for 19 of its last 20 quarters. However, Titan has generated positive cash flow from operations in only three of its last 20 quarters. Information on perfect shorts including a definition and case studies is available at the OnlineFinancialSector.com.

Titan Machinery has missed its guidance and has had its share price gap down for each of its last four announced earnings reports. I believe that its shares are susceptible to gap down or collapse by sometime within the next 12 trading days. Titan has historically announced its Fiscal Year earnings reports during the first week of April. In May of 2013, Titan pre-announced its first quarter earnings report by 10 days as compared to its historical announcing of the report in early June in previous Fiscal years.

Share Price Declines for each of Titan Machinery's

last Four Reported Earnings Announcements.

Report date

Previous close

Close on report date

Declines

04/10/13

$26.12

$22.45

-$3.67

05/24/13

$22.50

$20.40

-$2.10

09/06/13

$17.65

$16.75

-$0.90

12/06/13

$17.47*

$15.01

-$2.46

*12/02/13

Titan Machinery's share price has hit new 52 week lows on each of its last four consecutive earnings announcement dates. Based on this trend we believe that the probability is very high that its shares will hit a new 52 week low when it reports or pre-announces its earnings for its fiscal year ended January 31, 2014, sometime within the next 12 trading days.

The problems that Titan is now facing are the same that all perfect shorts face in the weeks and months just before they file for bankruptcy. The credibility of a Perfect Short's management team steadily declines due to a company's deteriorating fundamentals and missed earnings forecasts. The result is that the interest by institutional investors to invest in a secondary equity offering wanes. Their market caps also shrink to the point at which that they cannot raise sufficient capital via a secondary offering. Not having access to sufficient equity capital via a secondary offering is an extremely negative situation for a perfect short. It's because they already have been overwhelmed by debt and have exhausted or have tapped out their lines of credit. They completely run out options to perpetuate their flawed business models.

The table below illustrates Titan's "No Way Out" problem that their management team now faces. Titan's ratio of Market cap to Total Liabilities ratio has declined from 1.086 on 01/31/11 to 0.254 on 10/31/13. For Titan to get this ratio back to even 01/31/13 levels would require that the company issue and sell new shares to raise more than $300 million or sell off its inventory at a deep discount to reduce its liabilities by $600 million. Either best case scenario possibilities announced by Titan would result in a sell off and a decline of its shares by at least 50% as compared to the most recent $16.00 price of their shares.

Total Liabilities, Market Caps & Market Cap/Total Liabilities Ratios for Titan Machinery

Balance Sheet Date

Total Liabilities

(millions)

Market Capitalization

Market cap/Total Liabilities Ratio

10/31/13

1,320,684,000

335,955,000

0.254

01/31/13

1,044,155,000

560,783,000

0.537

01/31/12

750,733,000

588,644,000

0.784

01/31/11

434,289,000

472,023,000

1.086

There is another reason why I believe that the probability is high that Titan's share price could decline by 50% or further from its most recent share price within the next 10 trading days. The company is expected to release its earnings report for its Fiscal Year ended January 31, 2014 in early April or sooner.

In July of 2013 Titan Machinery, which is headquartered in North Dakota changed its auditors from Eide Bailly LLP which is also headquartered in North Dakota to Big 6 auditing firm Deloitte & Touche LLP. In switching its auditors Titan went from being the biggest fish in a small pond to a much smaller fish in a much larger pond. With this switch I believe that the probability is high that Deloitte will take a much more conservative stance than Eide Bailly regarding Titan's chronic reporting of cashless profits. It could result in the company having to report significant write-offs. I also suspect that Titan's Directors made the switch to Deloitte to limit their personal liability for when that eventful day comes in which the company will have to file for bankruptcy.

I offered Titan Machinery's management an opportunity to comment on or to rebut the findings in this report. Titan's management declined and stated that it would not respond to this or any other report until after the company's earnings report for its Fiscal Year ended January 31, 2014 was released on April 10, 2014.

Its currently very difficult to borrow shares of Titan since its current short position represents 34.9% of its float. However, Titan Machinery has puts and calls which trade on the CBOE.

A four minute video that explains the dynamics on how negative Cash Flow from Operations (CFFO) impacts a "Perfect Short" and includes case studies of several actual perfect shorts which filed for bankruptcy is available for viewing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Source: Titan Machinery Is A Perfect Short