Buying into a company at a low price is a great way to generate attractive returns, especially if you are patient enough to wait out volatility. But there is a big difference between buying stocks at a discount and buy stock in a company that deserves to trade at a discount. In the first case, you are acquiring shares in something that is fundamentally undervalued. And in the second, you’re buying stock in a company that’s being punished by the market for being inconsistent in its performance or just poor overall performance. In this second category is, I believe, Titan International (NYSE:TWI). Although the company has an interesting set of operations, its overall performance over the past few years has been questionable. Stocks are trading at a low price, both on an absolute basis and relative to their peers. But until we see a substantial change in the fundamental state of the company, it is likely that this discount is justified and the stock is, therefore, valued at fair value.
Ride with Titan International
According to the management team of Titan International, the company produces industrial equipment for wheels, tires and undercarriages. To better understand the company, we need to dive into each of these segments it operates. First and foremost, we have the agricultural segment. Through this, the company sells agricultural wheels, tires, and undercarriage systems and components for use on agricultural equipment such as tractors, combines, skidders, plows, planters, and agricultural equipment. ‘irrigation. These products are often sold to OEMs, but the company also sells its products in the aftermarket through independent distributors, equipment resellers and its own distribution centers. In the company’s 2021 fiscal year, this segment was responsible for 53.3% of its revenue and an impressive 67.5% of its profits.
Then we have the Earthmoving/Construction segment. This unit provides the same types of products but for earthmoving, mining, military, construction and forestry equipment. Examples include, but are not limited to, aerial work platforms, cranes, scrapers, self-propelled backhoe loaders, articulated dump trucks, haul trucks, backhoe loaders, lattice cranes, and hydraulic excavators. Some of the tires the company produces for this segment can weigh up to 12,500 pounds each. Last year, this segment accounted for 38.9% of the company’s overall revenue and 24.2% of its profits.
And finally, we have the Consumer segment. Sales here are bias truck tires in Latin America and light truck tires in Russia. It also offers other miscellaneous products for ATVs, turf, and golf carts. This segment accounted for the remaining 7.8% of the company’s revenue and 8.3% of its profit last year.
Although Titan International is a fairly small company, as measured by its market capitalization of just $1.13 billion at the time of this writing, the company has a fairly large global footprint. Of course, unsurprisingly, most of its business is tied to the US market. According to last year’s results, 47% of revenues came from here, at home. A further 26.9% of revenue was attributable to Europe and the CIS market, while Latin America accounted for 17.9% of revenue. This left the remaining 8.2% of revenue coming from all other international regions combined. Note that these revenue allocations are determined by the location of the affiliate making the sale, not necessarily the country the product ends up in. These geographical data can therefore be a little misleading.
Over the past few years, Titan International’s financial situation has been rather volatile. After seeing its revenue rise from $1.47 billion in 2017 to $1.60 billion in 2018, it then fell to $1.45 billion in 2019 before plunging to $1.26 billion in 2020. following the COVID-19 pandemic. This general downward trend is rather discouraging. However, we saw significant improvement in 2021 when revenue climbed to $1.78 billion. The increase in sales from 2020 to 2021 is specifically due to the strength of the company’s three operating segments. During this period, the company enjoyed a 23.4% increase in net sales coupled with higher volume. However, price and product mix accounted for 18% of its sales increase. Although some investors may like the idea that the change in price and product mix is due to stronger pricing power, it is simply much more likely (and even mentioned by management) that the change has largely driven by higher raw material costs and other inflationary impacts. the company experienced an increase in transportation costs. For 2022, management expects revenue to grow further, reaching $2.1 billion or more.
Results on the company’s bottom line have been equally volatile. After registering a net loss of $66.4 million in 2017, the company made a small profit of $3.9 million in 2018. But in 2019 and 2020, the company registered significant net losses of 50 $.4 million and $60.4 million, respectively. The improvement in revenue seen from 2020 to 2021 pushed net income up to $49.6 million for that year. Operating cash flow has also been pervasive, with a low point of negative $36.2 million and a high point of $57.2 million over the past five years. In 2021, operating cash flow was just $10.7 million. Even if we correct for changes in working capital, the situation is not much better. In fact, in 2021, the company lost $113.7 million in cash. This represents the company’s worst year in at least five years. EBITDA showed similar volatility. But at least in 2021, with a reading of $133.6 million, it posted a five-year high. The only direction given by management is that EBITDA should be around $200 million this year. If we annualize interest expense based on last quarter results, investors should expect operating cash flow of approximately $168.4 million for the year.
Speaking of 2022, Titan International is off to an interesting start. First-quarter revenue totaled $556 million. That’s 37.8% more than the $403.5 million reported a year earlier. Net income is also higher, rising from $13.6 million to $23.9 million. At first glance, cash flow from operations actually deteriorated from negative $16 million to negative $18.5 million. But if we adjust for changes in working capital, it would have gone from negative $77.8 million to negative $58.4 million. Meanwhile, EBITDA increased from $26.9 million to $56.9 million. No matter how you stack it, the company is definitely on track to meet the aforementioned goals for the year.
Dealing with such a volatile company can be difficult, especially when you want to try to add value to it. As an example, we only need to look at the price versus the operating cash flow multiple for the business. Using our estimates for 2022, the company is trading at a price for a forward operating cash flow multiple of just 6.7. But if we use 2021 data, that multiple rises to 105.6. At least the EV/EBITDA multiple should be less volatile. This number should be 7.8 if management achieves its objectives for this year. But if we see a return to 2021 levels, the multiple rises to 11.6. To put the price of the company into perspective, I decided to compare it to five similar companies. On a price/operating cash flow basis, these companies ranged from a low of 7.2 to a high of 329.3. Using our 2021 results, four of the five companies were cheaper than Titan International, while the 2022 results would make our prospect the cheapest of the bunch. If we use the EV to EBITDA approach, the range is 8.7 to 17.5. In this case, using our 2021 results, only one of the five companies was cheaper than our target, while the 2022 estimates would make our prospect the cheapest.
|Company||Price / Operating Cash||EV / EBITDA|
|Lindsay Company (LNN)||329.3||17.5|
|AGCO Corporation (AGCO)||24.1||8.7|
|CNH Industrial SA (CNHI)||7.2||12.1|
|The Toro Company (TTC)||24.0||16.5|
|Deere & Company (Germany)||26.8||16.6|
At first glance, Titan International seems like a compelling opportunity given the recent growth the company has seen and the low trading multiples the stock is targeting. However, the picture is much more complicated than that. Financial performance has been very volatile for a long time. While inflationary pressures and supply chain issues are likely to linger for some time, they are highly unlikely to represent a new normal. This means that the company is at high risk of returning to the type of weakness it experienced in previous years. If this happens, the stock goes very quickly from an attractive price to a very high price. Due to this uncertainty and the company’s poor track record prior to 2021, I can’t help but be very cautious about the future of this company.