Titan Machinery: Miles to Sow Before it Reaps

Titan Machinery Inc. (Nasdaq: TITN) has miles to sow before it sleeps. Cows and chickens and pigs need to be fattened, bread needs baking and the agro-fuel alliance keeps raiding the silo. Titan is doing its part: it has planters, combines, tractors, sprayers and, oh, one more way to profit from the boom in agriculture.

As one of the country’s largest dealers of new and used agricultural equipment, Titan owns 38 retail stores and two outlets in North Dakota, South Dakota, Minnesota and Iowa. Headquartered in Fargo, N.D., Titan’s sales are dominated by equipment from Case IH Agriculture and New Holland Agriculture; about 85% of revenue comes from agriculture, with the rest from construction equipment.

After 27 years in the business, Titan went public in December. Quite an auspicious outing: share prices have more than doubled since. That’s no mystery, considering record 2007 net farm income. Exports were up, helped by the weak dollar, and year-end stocks of key commodities were low. For 2008, USDA expects net income to rise 4.1% to $92.3 billion — 51% above the 10-year average. In all, it should be an exceptional year for producers, particularly those of corn, soybeans and wheat, the primal elements of the Midwest.

Acquisitions have helped as well. Titan in January bought Avoca Implement and Greenfield Implement, two Case IH farm equipment dealerships in southwest Iowa. In February, Titan acquired Ceres Equipment Inc., a farm equipment dealer of Case IH and New Holland brands in Roseau, Minn.

The purchase of Ceres continues management’s focus on gradually expanding its served area, said analyst Robert McCarthy at Robert W. Baird & Co. in a research note this month. “Titan’s ample balance sheet capacity can support considerable further acquisition activity.”

McCarthy estimated that Titan had a cash balance of $36 million at the end of fiscal 2008, on Jan. 31. He continued to recommend purchase, maintaining his initial “outperform” rating made in January and his $26 price target. Baird & Co. co-managed Titan’s IPO.

Titan is tending to its acquisition pipeline, management noted on its third-quarter conference call in mid-January, and sees this as a growth strategy that will carry for several years. Indeed, management sees a wave of consolidation coming in the agricultural equipment sector.

Titan tells its growth story like this: the large, expanding and fragmented farm equipment industry leaves lots of room for growth. Strong farm balance sheets, robust overseas demand and growing biofuel needs will keep producers flush for several years. Farmers will pay for new equipment to get each kernel off the cob and into their yields. New equipment will come with technology that will require more support from skilled dealers such as Titan. And the company will make more and more money from existing stores and continue to add new ones.

The story got off to a great start in the third quarter through Oct. 31. Sales increased 67% to $132 million, compared with the same period in the previous year, growing in all three of the company’s main segments. Equipment sales were up 78% to $103 million, parts sales increased 42% to $18 million and services revenue rose to $8 million, compared to $6 million in the previous third quarter. Titan expects fourth-quarter revenue at $127 million to $135 million, up 50% to 60% from the same period the previous year.

Third-quarter earnings per diluted share were $0.36, nearly tripling the $0.13 earned in the previous year’s quarter. For the fourth quarter, Titan expects earnings, excluding one-time costs, of $0.21 to $0.23. The company’s guidance for fiscal 2008 calls for revenue of $425 million to $433 million and earnings of $0.89 to $0.91, not including the one-time events.

“We believe current valuation levels do not fully discount Titan's substantial growth potential,” McCarthy said in a research note after third-quarter results. In addition to the strength in agriculture, Titan’s business model enables it to focus on acquiring and serving customers, and allows it to leverage its scale and administrative resources to drive margin expansion.

McCarthy’s $26 target is a 34% gain from Wednesday’s close at $19.20. Titan’s IPO priced at $8.50 per share, and the 52-week range is $11.50 to $21.42; the market cap is near $250 million.

For 2009, Titan’s guidance is for earnings per share of $0.77 to $0.82, below fiscal 2008 because of a higher share count as a result of the company’s IPO. McCarthy put 2009 net income at $10.6 million, up 44% year-over-year and not including the impact of potential acquisitions. Titan’s forecast for 2009 revenue is $530 million to $590 million.

Despite the bullish outlook, Titan may have a few rocky rows to hoe. It is dependent upon CNH Global (NYSE: CNH), the company formed in 1999 through the Case/New Holland merger. If CNH’s products falter, so too will Titan. Its fortunes also are tied to the farm economy — dandy for now but fickle as the weather. Titan’s business is concentrated in a relatively small region, and it has exposure to the construction industry. And, as McCarthy notes, acquisitions are key to growth, so a slowdown here would hurt the company.

So far, Titan (TITN) — and its investors — are enjoying agriculture’s heyday. But there are miles to go, indeed, and many promises to keep.

Comments

[Pilot Guy]

I wish them well - but there is no reason why this model will be any more successful than the defunct Auto Superstores. What value do they add vs. regionally owned dealers?
I have run an ag manufacturing business for 20 years supplying large and small dealers - guess who is more successful in the inevitable downturns in the ag economy?
Many Ag enterprises are being floated by the current rising tide - I am grateful for that - can anyone one say tulip bulbs?

[HarMegiddo]

tulips had NO underlying value. that's what defines a bubble. corn, soy, and wheat will ALWYAS have a value, unless people stop eating??
these idiots throw around this "bubble" word way too often.