TITAN INTERNATIONAL INC TWI
January 08, 2014 - 9:08am EST by
kalman951
2014 2015
Price: 17.30 EPS $0.92 $1.04
Shares Out. (in M): 54 P/E 19.6x 16.6x
Market Cap (in $M): 926 P/FCF 13.5x 10.0x
Net Debt (in $M): 318 EBIT 122 141
TEV ($): 1,244 TEV/EBIT 10.2x 8.8x

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Description

Quincy, IL-based Titan International, Inc. produces wheels, tires, and associated equipment for off-highway applications including farm machinery, construction, mining equipment, and certain consumer applications like ATVs and golf carts.  The Agricultural market is the Company’s historic strength and makes up 54% of sales, while Earthmoving / Construction accounts for 36% of sales and Consumer is 10% of sales.  Roughly 60% of Titan’s revenues are generated in North America with the balance in Europe and South America.

While Titan’s core businesses carry a mid-single digit growth rate over the cycle, Titan began a radical transformation process in 2005 when it kicked off an aggressive acquisition strategy.  Titan has accelerated the growth in its business by acquiring niche assets embedded in larger companies that garner little attention from the parent company.  Most of the time, Titan is the only willing buyer of such noncore assets and therefore is able to acquire them at attractive prices.  The Company has stated that it is unwilling to make any acquisitions at prices above 5.5x EV/EBITDA, and they have proved a willingness to walk away from acquisition opportunities when appropriate (like Goodyear Europe).

I would not view Titan as a traditional rollup, but, more so, as a single operating company that has done an excellent job integrating different brands together at attractive prices under the Titan umbrella.  Titan looks for non-core assets embedded in larger companies that distract the parent from the primary operating tasks at hand.  Ideally, Titan would buy non-impaired assets from a willing seller that wants to exit the business and focus on their core operations. 

The Company enjoys competitive barriers to entry, supported by exclusive tooling equipment, niche markets with high startup costs, scarce production machinery that is highly specialized for extremely large tire sizes, and a strong reputation with customers.  Titan is the only company to produce both the wheels and the tires for the markets they serve, which has contributed to its dominance in the North American Agricultural OEM market.

From 2002-2012, Titan has increased sales/share, EBITDA/share, and earnings per share at 6.6%, 22.2%, and 20.2% pace, respectively.  Chairman and CEO Maurice “Morry” Taylor has grown this business by leaps and bounds and has transformed the competitive landscape of the off-highway wheel and tire industry.  The stock price has responded positively during most of this period, although the stock price has fallen by roughly one-third in the last 12 months.  I believe that the recent stock price weakness is temporary and will work itself out within the next year. 

Tires and wheels are made and marketed under the Titan and Goodyear brand names; Titan pays Goodyear a 2% royalty for usage of the brand-name, which is an arrangement that started as part of the Goodyear farm tire acquisition in 2005.  Titan offers rims, wheels, and tires for use on various agricultural and forestry equipment, including tractors, combines, skidders, plows, planters and irrigation equipment.  It sells its products directly to agricultural equipment OEMs and to the aftermarket through distributors, dealers, and its own distribution centers. Within its Earthmoving/Construction business, Titan provides wheels and tires for various earthmoving, mining, military, and construction equipment.  In the Consumer segment, it offers tires, wheels, brakes, undercarriages, and other associated equipment for boats, recreational, and utility trailer markets, as well also for ATVs, golf carts, and other niche applications. 

Aftermarket sales are a recurring source of revenue for the Company; as an example, tires need replacement whether a farmer is buying new equipment or not.  In some cases such as giant tires used for extremely rugged mining applications, these highly specialized, very expensive tires need replacement every nine months.  For new OEM tire and wheel sets, tires typically make up roughly 65% of the cost of the completed unit, while the wheel makes up the balance.  While the aftermarket sales are less cyclical than OEM sales, they are moderately and unsurprisingly more profitable.  In most cases, the aftermarket tends to be larger than the OEM market.  Titan’s goal is to expand its brands and global presence and thus derive more of its sales from the less volatile and more profitable aftermarket. 

Chairman and CEO Taylor led a leveraged buyout of the Company in 1990 and has been the driving force behind the Company’s acquisition strategy and in building the Company to be the dominant player in the farm tire business in North America.  Taylor’s commitment to shareholder value is an important asset, although he can accurately be construed as a maverick and/or a loose cannon (that’s an understatement).  However, it should not be forgotten that he has demonstrated strong shareholder returns under his tenure as Chairman and CEO of Titan, and that remains his number one priority. 

At the end of November 2013, Titan came out with 2014 management goals:

  • Revenues of 2.4 - $2.7 billion.
  • EBITDA of $240 - $270 million.

Although Titan did a terrible job in forecasting the business in 2013, one would hope that management has set the bar a lot lower.  Nevertheless, should management be reasonably accurate in this forecast, that would imply that the stock is currently trading at ~5.3x EBITDA.  A reasonable valuation estimate for this stock is likely around 9.0x, which would translate to a stock price of around $33 or or nearly a double from current levels.  9.0x is a reasonable multiple, given that the median multiple over the past five years is 9.2x and the median multiple over the past 10 years is 12.6x.  Assuming the Company misses the low-end of 2014 EBITDA guidance by 20%, that would still translate to a $25 stock price (~45% upside). 

To be fair, EBITDA margins are above historical averages as well.  Using the 10-year historical average of 8.6% and the 9.0x EBITDA multiple on expected 2014 revenues, the valuation calculated would be close to $28.  You can slice and dice valuation a variety of different ways, and most valuations will lead you to recognize that the stock is highly undervalued at current prices.

While near-term fundamentals appear clouded and the stock is flat on its back, the long-term fundamental growth thesis for the category is attractive, and Titan has done an excellent job in positioning itself as one of the pre-eminent global off-highway tire and wheel producers to the agricultural, mining, and construction industries.  The Company boasts a series of factors that bolster Titan’s competitive moat, and the valuation is compelling.  While Titan’s lack of cash returns to shareholders and aggressive acquisition strategies are concerning issues that warrant close monitoring, management has done a terrific job of positioning the Company for future growth.

 Risks

  • The Company is exposed to price fluctuations to key commodities.
  • The customer base is relatively concentrated. 
  • Acquisition integration risk is high. 
    • The Company competes in highly cyclical markets. 
    • A continued and accelerating downturn in the agricultural sector.

Disclosure

We own shares of Titan and may buy more or sell our shares at any time without notifying VIC.

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Normalization of weather patterns results in normalized prices for corn.
  • CEO Morry Taylor retires.
  • Mining and construction become less of a burden on profitability.
  • Titan is able to gain operational efficiencies on its new acquisitions.
  • OEMs stop dumping tires onto the market at cut-rate price.
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