Titan Machinery's share price (NASDAQ:TITN) is on the precipice of a total collapse. Its shares have closed at lower prices for the last eight consecutive days and closed last week at a four year low of $14.00. The sharks smell blood in the water. The volume of Titan's September and December $12.50 and $15.00 put options on Friday was 26 times its daily average share volume.
Due to the plummeting crop and corn prices during the second half of July my timetable has been moved up. I am now predicting that Titan will voluntarily file for or be forced into bankruptcy by October 31st at the latest and by sometime during the month of August at the earliest. In December of 2013, I had first predicted that Titan would file for bankruptcy by the end of 2014.
The rationale or basis for my dire prediction is that Titan's management took a significant risk or made a big bet when it decided to embark on a strategy to increase the company's equipment inventories and total liabilities to near record, if not record, levels during the first half of its fiscal year ending January 31, 2015. For its first fiscal quarter Titan increased its debt by $38 million to increase its equipment inventories from $1.075 billion at its quarter ended January 31, 2014 to $1.116 billion for its quarter ended April 30, 2014.
Titan's management stated in its June 5, 2014, conference call that the company's strategy for its second fiscal 2015 quarter ending July 31, 2014 was to further tap its credit lines to increase its equipment inventories. Management's strategy was for the company to significantly increase its inventories during its first half of its fiscal 2015 year to have the ability to meet the demand from farmers in its fiscal 2015 third and fourth quarters ending October 31, 2014 and January 31, 2015 respectively.
The strategy of Titan's management to bet the farm by increasing their equipment inventories during the first half of the company's fiscal 2015 has backfired. Since Titan's early June investor conference call was held, the price of a bushel of corn has fallen by 30%. What was very unlucky for Titan was that much of the free fall in corn prices occurred during July which is the last month of its second fiscal quarter. Therefore, the probability is high that Titan had already increased its equipment inventories and debt significantly for the quarter before the precipitous drop in crop prices began. From June 30th to July 31st a bushel of corn fell from $4.41 to a recent $3.80. The year over year decline is approximately 45% based on the price being $6.79 per bushel on July 31, 2013.
The following excerpts are from an article, "With no sign of increased demand, farmers battle falling corn prices," that was in the Omaha World Herald newspaper on Sunday August 3, 2014 will effect Caterpillar (NYSE:CAT) , Deere (NYSE:DE) (NYSE:CNHI) (NYSE:AGCO):
- "Corn prices are below the cost of production this year for the first time since 2005."
- "But the rapid reversal of grain prices and downward predictions are enough to make Nebraska and Iowa farmers think back to 1981, when profits disappeared and 15 straight years of losses triggered the farm crisis that collapsed thousands of farms' finances."
- "'I don't think it's dawned on everybody yet how serious this is going to be,' said Dennis Bauer of the University of Nebraska-Lincoln extension office in Ainsworth. 'It's going to be far-reaching, not only the producers but the equipment dealers, car dealers, everybody.'" "It's a train wreck ready to happen."
- "But agriculture is cyclical, and many experts believe the cycle is headed down. The Agriculture Department predicts that corn prices will average $3.65 next year, bottom out at $3.30 in 2016 and stay below $4 a bushel until 2023. Soybeans, the Midlands' second-largest crop, will follow suit."
The price of a bushel of corn falling to below a farmer's cost to produce it for the first time in nine years is a worse than a bad omen. The result is that widespread pessimism and the predictions of even lower crop prices are now rampantly spreading throughout the USA's farming communities. This makes it virtually impossible for anyone to get farmers to open their wallets for anything much less get them to make purchases of new or used farm equipment.
The sentence at the end of my introductory paragraph in my June 18, 2014, report, "Declining Profits and Higher Credit Costs Add Risk to Titan Machinery as a Going Concern," sums up what I had been predicting could potentially happen due to the risk that Titan's management had decided to take:
Management's strategy to borrow to build up inventory by $41 million to $1.12 billion during its first quarter of 2015 (ending April 30, 2014) and to also increase its inventory during its second quarter (ending July 31, 2014) and then to only have to liquidate at least $291 million in inventory in it last two fiscal quarters to meet its inventory reduction guidance is risky.
In that same report, I predicted that a big question Titan would have to face during the second half of its 2015 fiscal year is how drastic will the haircut be when it starts to liquidate its inventories at August 1st? I had calculated that even a modest discount of 5% would put the company on the threshold of violating its credit agreement with Wells Fargo. A discount of 10% or more would most likely result in Titan violating its credit agreement entirely. Based on July's crashing crop prices, I am skeptical that Titan will be able to liquidate their inventories at even a 10% discount. Since crop prices are expected to remain low for the foreseeable future, I predict that the eventual liquidation of their inventories will not even cover their total debts.
My new question that I believe will soon be answered is, how soon will Titan violate its credit agreement with Wells Fargo or has it already violated it? In violating the credit agreement Titan will be either be forced into or will have to voluntarily file for bankruptcy to protect itself from the lenders who collectively have outstanding loans to it of more than $1 billion.
If Titan did not violate the terms of their credit agreement in their quarter ended July 31st, I predict that the company will likely file for bankruptcy before they close the books on their third quarter ending October 31st. If they violated the agreement for their most recently closed quarter, I would expect them to file for voluntary bankruptcy by the end of August.
Titan has generated positive earnings or net income while generating negative cash flow for every fiscal year since it became a public company. Over its last five fiscal years Titan has reported a cumulative $132 million in earnings or net income while at the same time generating $462 million of negative cash flow. The bottom line is that Titan earnings are meaningless since they are completely cashless. It's been a house of cards since its IPO and it will soon be coming down.
The big issue that I have with Titan Machinery is that it is a "poster child" for those companies which do not have viable business models. Such companies as Titan are only kept alive via the continuous debt and equity financings that are provided by Wall Street for the purpose of their being able to generate ongoing commissions and investment banking fees from them.
Titan has been on my radar screen ever since it had been diagnosed multiple times by StockDiagnostics.com as having "The EPS Syndrome". It's a Financial Statement or Cash Flow Statement disorder that I discovered and named following my performance of an autopsy on Enron after it filed for bankruptcy. I had also discovered that there were more than 100 companies prior to Enron including Sunbeam which had un-expectantly filed for bankruptcy after it had been afflicted with The EPS Syndrome.
To learn more about The EPS Syndrome and the well-known companies who went out of business after being diagnosed as having it including Lehman Brothers, there is a four minute video titled Titan Machinery is a Perfect Short that I recommend. Additional information on the EPS Syndrome and Perfect Short Research™ is available at www.onlinefinancialsector.com.
This article was originally published at Equities.com on Monday August 4,2014.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.