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Giant Hopes

|Includes: Titan International Inc. (TWI)

I was only peripherally aware of TWI until yesterday.  Last night, the company announced preliminary guidance for 2010 as well as the closing of its highly dilutive convertible deal.  While the guidance seemed pretty good to me, the two analysts had some rather aggressive assumptions previously.  I took a position in AH and did some work on the name.  Unfortunately, I don't think this one is a keeper despite it being very cheap (trades at TBV), but I may hang onto it.

TWI is a leader in off-road tires (mining equipment, agriculture).  They are focused, appear to have some technology and have made some major investments that are now behind them.  They want to be a consolidator of the industry, but their balance sheet (before the convert) was impeding their chances.  The end-user demand has declined this year, but inventory destocking has been even more severe.  CEO Taylor's view of 2010 is that production should more closely match what will prove to be stable demand.

The company issued a forecast for sales to grow in 2010.  EBITDA is forecast to be $75mm roughly, which will be an all-time high.  CapEx will decline sharply, so this should be a free cash generator to the extreme (10% of the market cap assuming the EBITDA forecast is correct).

The company has $193mm of 8% notes due in two years.  Prior to the convert (172mm of a 5.625% coupon, 7yr maturity, 10.75 conversion price), the company had $45mm (and now $210mm roughly).  The company is negotiating with Goodyear and is pursuing other acquisitions and will use the cash (along with the assumption of debt and the possible issuance of stock) to fund a deal.  Until then, the convert eats up $10mm a year in interest expense.  Presumably, the company could take out the existing debt in short-order if it isn't able to agree to terms.  Also, CEO Taylor is considering some sort of securitized financing of his tooling equipment as well.

I find the timing interesting, as the stock has been beaten up by the rather large convertible issuance and has reacted poorly to the guidance (despite it actually being very solid if achieved).  There is considerable optionality here, as the company could execute a very accretive transaction.  The theme is solid - look at the stocks of the types of companies associated with big tires (BUCY, JOYG, DE, CAT).  Anyone have an opinion?

Disclosure: Long