Titan Machinery Stock: Adding At A Good Point In The Cycle (NASDAQ:TITN)

Shares of Titan Machinery Inc. (NASDAQ:TITN) have come to life a bit in recent times as the company announced a relatively large deal, at least given the size of the business. I have actually not covered the name before, so let’s first have a look at the business and some recent news to see what Titan is all about.

Power & Precision To Grow

Titan Machinery was founded in 1980 with a mission to service customers better. The company is all about using purchasing power, equipment, parts, inventories, service, and expertise to the advantage of its customers. The company operates full-service agriculture and construction equipment dealer locations in North America, and Europe as well. The company is represented in major agricultural locations, cooperating with leading brands like CNH, New Holland, Case, and others.

In March of this year, the company posted its results for the fiscal year 2022, which were every good. Full year sales rose 21% to $1.71 billion. These sales are largely comprised out of equipment sales, reported at $1.29 billion, complemented by parts, service and rental activities. In terms of segments, the business is driven by the agricultural market at $1.08 billion, a more than $300 million construction business and a more than $300 million international business.

The company has been very profitable as it has leveraged the growth extremely well with operating profits of $37 million rising to $90 million last year, as net earnings more than tripled to $66 million, with earnings posted at $2.92 per share on the back of 22 million shares outstanding. Net debt was equal to just $70 million as I have even included floorplan payables in this calculation, while not counting financing receivables as an asset.

The profit explosion was driven by delayed spending coming out of the pandemic and strong outlook for farmers worldwide amidst rising soft commodity pricing as this triggered a rally in the shares. After all, shares have been trading range bound between $10 and $40 from 2007 onwards, as the $10 stock ahead of the pandemic rallied to a high of $38 late in 2021, now trading at $25. Based on the 2022 earnings performance, the multiples were not demanding at 8 times earnings amidst a solid balance sheet, as the business is very volatile in terms of earnings performance, with earnings being posted at less than a dollar in 2021.

These look like very low multiples, yet the reality is that the performance has been a mixed bag in the past decade, in fact quite disappointing. Titan was a $2.2 billion business a decade ago, which is much higher than today´s sales numbers, certainly if we adjust for inflation, as operating margins typically came in between zero and 5% of sales over the past decade.

And Now?

After shares peaked at $38 late last year, shares have now fallen back to $25 as the news has not been all that positive. For the fiscal year 2023, the company guided for earnings to come in between $2.55 and $2.85 per share, a bit lower from the 2021 numbers, as the company has seen a boost from a Jaycox purchase in December 2021 and the Mark’s Machinery acquisition in April 2022. On the other hand, the company has made some divestments as well, as the activities in Ukraine will hurt international sales in a meaningful way and hurt earnings by an expected $0.25 per share.

Amidst booming soft commodity prices, it was the company which hiked the full year guidance alongside the release of the first quarter results in May. Full year sales rose 24% to $461 million as the company hiked the midpoint of the adjusted earnings guidance to $3.00 per share following a first quarter earnings number of $0.79 per share. This guidance hike has been driven by relative strength in all segments, notably the agricultural business activities at home in the U.S. Net debt inched up to $129 million as floorplan payables rose to $189 million, equal to about 1 times EBITDA posted here.

The 22 million shares of the company trade at $25 here, translating into a just a $550 million equity valuation. Net debt made this valuation increase to $680 million, yet that definition of net debt is a bit conservatively assumed here.

A Big Deal

In July, Titan announced a sizable deal, arguably driven by the strong operating momentum, fueling confidence of the management team. Titan has reached a deal to acquire Heartland Ag Systems, the largest Case IH Application Equipment dealership in the U.S. The deal is valued at $110 million, equal to about a fifth of the own equity valuation, and will add some $214 million in revenues and $15 million in EBITDA. This implies a 0.5 times sales multiple and just over 7 times EBITDA multiple, which were actually are somewhat richer multiples compared to the valuation of Titan at around 0.3-0.4 times sales and EBITDA multiple which is about a turn lower.

Shares rose approximately $2 on the back of the deal, adding nearly 50 million in value to the firm on the back of distribution advantages. The company sees $60 million in revenues synergies, worth $0.13 per share on the back of the combined capabilities and footprint of the activities, driving total accretion to $0.43 per share. This creates a pro forma earnings number around $3.50 per share as net debt will double to approximately $220 million here, still manageable, as net debt has increased following the deal, but includes floorplan payables, yet we have to remember that earnings performance is historically strong here.

And Now?

With shares trading at $25, and earnings coming in around $3.50 per share, the valuation looks very compelling at around 7 times earnings. The reason for that is that current earnings look very strong, and historically are. With historical margins seen between flat and 5% of sales, it is perhaps reasonable to assume a 2-3% average margin number through the cycle, revealing about $50 million in operating earnings as an average. After interest costs and taxes, earnings power might come in around $35 million, or just over $1.50 per share. If that is realistic the earnings multiple comes in at a much more reasonable 16 times earnings here.

Hence, it seems as is Titan is fairly valued despite the cheap optics here. On the other hand, food security and higher prices is somewhat different from the past, as perhaps a 2.5% operating margin assumption is a bit defensive, given today’s circumstances in the world. Then again, the role of Titan in the industry is more of a middle man and service provider, leaving it vulnerable to direct to business sales from major players like John Deere (DE) pushing new product lines and automation. The simple fact is that I consider shares to be fairly to somewhat cheaply valued here.