A number of prominent companies with global exposure have recently warned that a slowdown in business is at hand. For example, not long ago, Caterpillar (CAT) lowered earnings expectations due to weakening demand for its heavy machinery equipment. Sometimes a warning might be just company specific rather than a harbinger of an industry wide or global slowdown. However, Federal Express (FDX) also recently warned that reduced global shipments would also force it to lower forecasts.
It does appear that an industrial slowdown is coming. The Chicago Purchasing Managers Index recently dropped below 50, which is often a sign of a coming recession. Even more recently, Cummins (CMI), which manufactures diesel and natural gas powered engines for the heavy- and medium-duty truck, bus, agricultural, construction, oil and gas, rail, and other markets, just warned that it was lowering full-year revenue guidance to $17 billion from $18 billion and cutting up to 1500 jobs due to slower than expected demand. In response to the earnings warning, shares of both Cummins and Caterpillar fell sharply in the after-hours session. The fact that Caterpillar shares also dropped after a warning from Cummins could be a sign that other companies related to this industry will also face weakness in the coming days.
Here's why warnings from both Caterpillar and Cummins are potentially troubling for a company like Titan International, Inc. (TWI):
1) Titan makes farm and heavy equipment tires that are used in the
construction, forestry and mining industries.
2) Caterpillar makes the type of heavy machinery that often uses the type of tires that Titan makes.
3) Cummins makes some of the engines that are also used in everything from heavy agricultural and mining equipment to trucks that also use Titan-made tires. When major industry bellwethers warn of a slowdown, it seems increasingly likely that Titan could be also impacted.
Titan shares could be a value trap as it looks reasonably priced with a price to earnings ratio of about 8. However, with recent profit warnings coming from two major bellwethers in the same industry, earnings estimates for Titan might also be too high and prone to downward revisions. It's hard to see how a leading engine maker and a major equipment manufacturer could see reduced demand without that leading to reduced demand for a tire maker like Titan. Also, it is worth noting that Titan shares do not look undervalued when compared to another tire maker: Goodyear Tire (GT) trades for about 6 times earnings and if Titan had the same multiple, the stock could go to about $14 per share.
On September 20, when Titan shares were trading around $19, Zacks
Investment Research downgraded the stock to a strong sell rating.
Titan shares have been in a downtrend and that looks likely to
continue. The stock is now just slightly above the 52-week low and
that means it could be testing or making new 52-week lows soon.
That's why investors should heed the recent warnings by other
companies and avoid Titan shares until more clarity arises with the
Here are some key points for TWI:
Current share price: $18.20
The 52 week range is $16.86 to $29.95
Earnings estimates for 2012: $2.32 per share
Earnings estimates for 2013: $2.76 per share
Annual dividend: 2 cents per share which yields .1%
Here are some key points for CAT:
Current share price: $84.75
The 52 week range is $77.95 to $116.95
Earnings estimates for 2012: $9.45 per share
Earnings estimates for 2013: $10.16 per share
Annual dividend: $2.08 per share which yields 2.4%
Here are some key points for CMI:
Current share price: $90.84
The 52 week range is $82.20 to $129.51
Earnings estimates for 2012: $9.58 per share
Earnings estimates for 2013: $10.63 per share
Annual dividend: $2 per share which yields 2.2%
Data is sourced from Yahoo Finance. No guarantees or representations
are made. Hawkinvest is not a registered investment advisor and does
not provide specific investment advice. The information is for
informational purposes only. You should always consult a financial
Disclosure: I am long GT.