Cramer's Late to Titan's Party; I Prefer Agco

Classic Jim Cramer - Monday afternoon he was pumping Titan Machinery (TITN) (it's "sizzlin"), after a nice 11% pop for the day, and 70% increase in 7 weeks. You just have to love him for his momentum chasing ways...

This is a name one of our readers had brought up in a comment last week, and John over at Real Deal blog, has been high on since February (this was a recent IPO). This is basically a tangental play on the global agriculture boom - they are basically the retail end for selling agriculture equipment. Not necessarily my cup of tea, but the stock performance speaks for itself - but unlike Cramer who is now pumping it at 35 x FORWARD estimates (for a retailer mind you), I'd rather listen to people like John who climbed aboard at 20 x estimates.

It appears from my cursory glances at the company that it deals with CNH Global (CNH) product, but the stock of Agco (AG) was flying, perhaps due to this news, but also a positive analyst report on the group, which has been lagging severely of late. If one were to play this space, Agco (AG) is definitely my favorite. [Apr 29: Agco Unfairly Hit on its Guidance]

• Meanwhile, farm equipment companies got a boost on Monday after Wachovia Capital Markets analyst Andrew Casey said long-term demand for agricultural equipment remains strong. He said North American demand for the machines continues to outpace supply and most manufactures are sold out for this year. This is because of soaring corn prices, which currently sit at about $7.32 per bushel.
• At the same time, the companies have been able to pass along rising steel and shipping costs to their customers and used equipment prices remain strong.
• Casey upgraded Duluth, Ga.-based Agco (nyse: AG) to “outperform” from “market perform” and boosted his valuation range to $63 to $66 from $60 to $63, citing a recent pull back in the company's share price and the long-term crop price outlook.

The line I highlighted above is key, because one concern for me - and why I've been focusing on the fertilizer over equipment is the rising input costs causing potential margin squeezes. [May 17: Fast Rising Steel Prices Set Back Big Projects] I still think at some point this happens, but it appears that for now farmers (at least in North America) are continuing to absorb the higher priced product without pushing back...[May 14: Deere Earnings - Why I'm Avoiding Equipment Stocks] Again, I must ask when company after company is citing cost inflation in their inputs, and some have been passing them along to the end customers - how can there not be more inflation in the government reports? Ah, I know the answer to that; I am simply asking a rhetorical question.

Back to Titan Machinery (TITN) - not to be mixed up with Titan International (TWI) [another stock we like, which also was up strongly - I am sure some people bought the wrong stock], a quick review of earnings/guidance. Despite relatively low gross margins of 16%ish (they are a retailer after all) the key is, analysts missed the boat - and when that happens, your stock goes up.

• Titan Machinery Inc (TITN), posted quarterly results that topped Wall Street's targets, boosted by higher sales of farm equipment, and it raised its full-year outlook, sending its shares to a lifetime high.
• The company, which owns and operates agricultural and construction equipment stores, reported a four-fold rise in first-quarter profit to $3.4 million, or 24 cents a share, from $800,000, or 12 cents a share, a year earlier.
• Revenue nearly doubled to $152.6 million. (keep in mind they are rolling up mom and pop shops so this figure is a bit deceiving - its not 100% organic growth by any means)
• Analysts were expecting earnings of 13 cents a share, before special items, on revenue of $119.5 million, according to Reuters estimates.
• Equipment sales, which chip in about 80 percent of the company's total revenue, also rose two-fold to $120.9 million.
• "A delayed planting season due to rain may have allowed customers to increase their equipment, parts and services purchases as opposed to a more normal quarter," Chief Financial Officer Peter Christianson said in a conference call.
• "Weather helped benefit this quarter, which probably means that there is less of a benefit from equipment sales in the future quarters," analyst Robert Evans from Craig Hallum Capital said by phone.
• Titan expects full-year earnings of 86 cents to 91 cents a share, compared with its prior view of 77 cents to 82 cents a share.
• The company, which went public in December last year, now sees revenue of $575 million to $625 million for the year. It had previously forecast revenue of $550 million to $600 million.
• Even with the general economy facing a slowdown, farmers are able to spend more on agricultural equipment to get the highest yield, Evans added.

And to make this post a full circle, as our national TV pundit says - there is always a bull market somewhere. But all these price increases have to be eaten by someone... and it is inflationary.

No positions other than enjoying the general agriculture halo

Comments

[False Profit]

Take this year's EPS for TITN, put a generous 25x multiple, and you get a $22 stock - substantially below where it's trading. Also note that the company is not generating any free cash flow.

[John Egan]

I looked at AG a week or two ago... Good numbers.. Just doesn't want to go anywhere.. It seemed to be trending between about $55 and $65+, but the bottom seems to have dropped out and it looks like its turning back down again... I'd be looking at $52 for resistance at this point...I'm guessing it's suffering along with DE.... I suspect the market thinks that the Mid-West floodings has killed farming for this year, so who's going to be buying tractors, tiller blades and etc.. I doubt that Asia and So. America will pull these companies back real soon.. Maybe next year will be better for the group.

Actually, I'm kind of curious about infra-structure. There is a lot of construction to be done over the next two or three years for the Mid-West to recover again. Insurers will lose some due to wind, but flooding is a Federal program. And individual home reconstruction isn't really the right business for single family reconstruction, but Weyerhauser and other suppliers might be a good pick now for the next two years... Then there's asphalt, road crews, electrical wiring... Could be interesting.. I'll have to check out who benefitted after Hugo, and the last big flood in this same area..

Thx jegan ;-)