Titan Machinery Inc (TITN)

Contents

Titan Machinery Inc. owns and operates a network of full-service agricultural and construction equipment stores in the United States and Europe. It operates through three segments: Agriculture, Construction, and International. The company sells new and used equipment, including agricultural and construction equipment manufactured under the CNH Industrial family of brands, as well as equipment from various other manufacturers. Its agricultural equipment includes machinery and attachments for use in the production of food, fiber, feed grain, and renewable energy; and home and garden applications, as well as maintenance of commercial, residential, and government properties.

The company’s construction equipment comprises heavy construction machinery, light industrial machinery for commercial and residential construction, road and highway construction machinery, and energy and forestry operations equipment. It also sells maintenance and replacement parts.

In addition, the company offers repair and maintenance services that include warranty repairs, off-site and on-site repair services, scheduling off-season maintenance services, and notifying customers of periodic service requirements; and training programs to customers. Further, it rents equipment; and provides ancillary equipment support services, such as equipment transportation, global positioning system signal subscriptions and other precision farming products, farm data management products, and CNH Industrial finance and insurance products.

The company operates in Colorado, Iowa, Minnesota, Montana, Nebraska, North Dakota, South Dakota, Wisconsin, and Wyoming, the United States; and Bulgaria, Germany, Romania, and Ukraine, Europe. Titan Machinery Inc. was founded in 1980 and is headquartered in West Fargo, North Dakota.

Pros

• Titan Machinery is an underpriced and surprising quality micro-cap business. Where most other dealerships remain private, TITN proves that going public and maintaining operating and financial discipline pays off. If they can keep the customer first over the long term, they have a chance at outpacing most other dealerships.

• Compared to other similar businesses, TITN is at an attractive valuation.

• TITN is ran by a founder, who has most of his net worth in the company.

• One of their largest segments in Ukraine is doing surprisingly well given the conflict with Russia. This shows grit.

• TITN operates within an extremely stable subsector. The demand for agriculture equipment is not going anywhere but up.

Cons

• No real moat. Ag dealers are plentiful. (This is a double-edged sword that TITN wields very well: while most other dealers are taking profits, TITN continues to grow and reinvest)

• Low Free Cash Flow margin. As a competitive sub-industry, TITN earns relatively low free cash flow compared to revenue.

• Low Return on Invested Capital. Growing is hard for TITN. There is no corner of the planet where the demand for ag equipment is not met.

• Tough long-term business.

TITN has relatively low ratios and statistics across the board, but still I was interested in checking them out.

The below statistics show a company that may not be a long-term investment, but a possible undervalued company. Notice the 10 year Combined Annual Growth Rate for FCF. Zero! Not a great start for TITN.

One of the other things I look for is a steadily increasing revenues. TITN has not gotten back to 2014 levels of revenue. This is another sign of a possible short-term mispricing, but not a long-term compounder.

You can see the last 10 years of revenues have not been impressive, but the latest swing upward is what grabbed my eye.

TITN has outperformed the S&P 500 in the last 10 years due to a recent swing downward by the market and swing upward by TITN. That says something about TITN. What are they doing right? Are they doing something right? Or is the market giddy about ag equipment?

From what I can see, I am assessing Titan Machinery at a high risk right now due to the nature of micro cap stocks in general. They tend to swing a bit more wildly than large cap stocks, as well as they are a little more unpredictable. I liken this to football. When you watch NFL, you know what you’re getting. When you watch high school football, sparks fly more often than not. The same goes for investing. Larger companies are more stable (recent events notwithstanding).

Besides the micro cap risk, no other equipment dealer has a monopoly or a niche. All the business segments within TITN are commonplace with other similar businesses. There is no moat.

Now we are getting into the weeds of the business.

TITN has a severe uptick in earnings per share, the highest it’s been in a decade.

Now let’s look at cash flows.

They look pretty shaky. It’ll be interesting to see if they can improve over the next couple years. From what I see now, it looks like they aren’t stable.

David Meyer owns a whopping 8.37% of the company, valued at over 60 million dollars. He is the largest owner of the company. This is very good for one big reason: it aligns himself with us investors long term.

This owner/operator can be inclined to think along the same lines as an investor, because he is an investor. This is a stark contrast from many companies whose executives live by fat salaries. Great public companies tie their executives to the performance of the company, and TITN is no different in this regard.

Since Titan is such a small public company, not a lot of notable investors will touch it. Of course, Vanguard, Black Rock, and other big names hold shares, but David Meyer has the largest holding percentage for any individual investor or firm.

Now that we covered the basics of the business, let’s get into the trenches of detail. Below is my main thesis of the company, and why it receives a rating of two stars.

The main thing about the agriculture industry that TITN resides in is that they are squeezed from both sides of the chain. On one end they are charged as much as possible from suppliers like CNH Industrial (Owners of Case and New Holland tractors, TITN’s main product). On the other end, buyers are frugal and smart. Successful farmers and buyers waste no capital on equipment that they do not need. In fact, it’s common for farmers to shop around and find ways to save every dollar they can.

This is where TITN comes in.

Along the same lines of our frugal farmers is the slow growth of the parent industry. Below is the average net farm income from 1980 to 2029. This might seem high but it’s a Compound Annual Growth Rate of 3.1%. This barely beats inflation.

Below is the large equipment dealer groups by brand in North America. Notice how John Deere is rivaling CNH/NH.

A smaller segment, construction, has a Compound Annual Growth Rate (CAGR) of 4.3%. Also, not great. We are looking for high demand, robust moat, high Free Cash Flow margins, or similar metrics. What we are seeing here is a tough market in a tough industry with no real moat.

1. The main reason I gave TITN 2 stars is their requirement for growth. This is tough. It takes acquisitions and outmaneuvering other players in the space with low margins. It’s like fighting a war with a spoon. It can be done, but it’ll take an exceptional team a long time to make significant headway. With the saturation of dealerships in the industry, it’ll be interesting to see if TITN can pull this off.

2. I see medium risk in TITN, mainly due to the nature of the industry and its predictability. Farmers need ag equipment, and always will. People need food, and always will. There will always be some demand for the ag industry. It’s just a matter of outperforming competitors. TITN has a strong history of slight outperformance, and I don’t see that changing anytime soon. Low risk.

TITN lives in the agriculture and construction industry. They offer new and used equipment, rental, and after-sales product support in the form of parts and services. Approximately 75% of revenue comes from equipment sales and 20% from parts.

TITN has 75 stores in North America and 35 stores in Europe with a strong focus in Ukraine and Romania.

Most of the profit that TITN makes comes from equipment sales, but this segment is also their lowest in gross profit margin at 10.1%. Their highest profit margin segment is services at 66.3%. It should be noted that the services segment only makes up 7% of total revenue.

TITN’s debt-to-equity is relatively low, which is something I’m always in favor of. I’m also a fan of decreasing debt-to-equity, as we can see below.

From the latest annual report:

It’s important to note here that TITN and CNHI have a mutual relationship, while DE, CAT, and the other regional sellers have a negative relationship. I included CNHI below in the competitor comparison to add light to the industry.

In looking at competitors, equipment dealers are mostly private. They have their locations listed, but that’s about all the information I can see on them. I cannot see their revenue or any other metrics. This is concerning. I would like to see why TITN succeeds in growing while other dealers succeed as well. It is a zero-sum sub-industry with no moats and dealers riding on the coattails of equipment manufacturers.

Let’s take a look at TITN and it’s competitors to get an idea about how they measure up against each other:

From what I see, TITN has no real long term advantage over its competitors.

But let’s look more at John Deere anyway. Here we have their global locations. You can see how plentiful their locations are in the midwest as well as Europe.

To me this is a taste of the bumping elbows of competitors. For those in the market for ag equipment, choices are everywhere. Where I live, in central Montana, there are numerous dealers located even though we have very little population. That should tell you something. Where there’s money to be made, dealers are trying to one-up each other.

If you’re like me then you like margins. They show us just how well a company can charge over its base price for products and services. It worries me to see a net margin of <5% on a continuing basis, but it makes sense. Tough competition drives margins down because no real moat. I don’t expect to see the increase continue in margins for TITN. They will probably top out at 5% net margin in 2023 due to the nature of the competition.

David has a history with Case IHL and is one of the original founders of Titan Machinery.

David also has the vast majority of his net worth tied up in TITN, which aligns his decisions and vision with investors. This is a great sign. Aligned leadership is rare.

What’s more, David founded TITN, so it goes to show that what he is doing works. While most other dealerships remain private, David was able to take TITN public and continue to grow it.

One of the main things that this shows is discipline in the small things, like parts and service, which have a much higher profit margin than equipment sales.

First off, Mark is leaving his position with Titan Machinery very soon. It will be interesting to watch Bo Larsen take his place.

During Mark’s time as CFO TITN has done pretty well and has served investors well, given the tough industry. They haven’t diluted shareholders or weighed themselves with an unnecessary dividend. Mark is a disciplined CFO.

Mr. Larsen joins Titan Machinery from CNH Industrial where he currently serves as the Head of Finance for CNH Industrial’s team focused on precision technology, which includes the acquired agriculture business operations of Raven Industries. Prior to joining CNH Industrial in connection with the acquisition of Raven Industries, Mr. Larsen held various positions at Raven Industries beginning in 2016, including as Director of Finance – Ag Division, Director of Investor Relations and Assistant Controller. Mr. Larsen began his career as an accountant with PricewaterhouseCoopers LLP, and is a Certified Public Accountant. Mr. Larsen earned a Bachelor of Business Administration and a Master of Professional Accountancy each from the University of South Dakota and an MBA from The University of Chicago Booth School of Business.  

David Meyer, Titan Machinery’s Chairman and Chief Executive Officer, stated, “We are delighted to have Bo join the leadership team at Titan Machinery. Bo brings substantial financial leadership experience as well as strategy development, financial planning and analysis, SEC compliance, accounting, and investor relations experience to our team. I am confident that Bo will provide strong leadership and is an excellent addition to the Titan Machinery team.”

Mr. Larsen added, “I’m thrilled to join the Titan Machinery organization and to have the opportunity to serve Titan’s customers, employees and stockholders. Titan Machinery has a long and successful track record of growth and I am excited to build upon that legacy of growth well into the future.”

Lots of mentions of “growth” so I hope they can pull it off. That’s the main thing when we boil this all down: how much can TITN grow? I’ll be watching David and the new CFO, Bo, to see what they come up with.

TITN’s valuation seems low when you’re used to looking at tech companies from 2021. However, TITN’s growth is not without pain. Growing a brick-and-mortar business takes money, time, and discipline across the organization unlike technology businesses. When we compare TITN valuations to other like-businesses, we’ll see just why those valuations are seemingly low.

Let’s take a look at Price to Earnings, the ‘norm’ for quick valuations:

The most recent P/E of 10.5 is ok. Not great, but not terrible. It’s the wacky wave over time that concerns me, along with the years of negative ratios.

Let’s check out Price to Free Cash Flow, one of my favorite metrics.

What I see in the P/FCF is a company that took a major hit in 2020 (understandably), then continues to climb back up the ladder. A P/FCF ratio of 5.1 is good. Anything under 15 is considered “cheap” but remember that we aren’t looking at a high-growth business in a rocket ship industry. These are tough businesses in a tough industry in a tough global environment.

Return on Invested Capital, another of my favorite metrics, is increasing steadily. This is one that I don’t see reaching much higher at all, but it’s not out of the realm of possibility.

Lastly, let’s look at Per Share Metrics.

I’m a big fan of seeing just how much I’m paying for revenues and FCF, more so than earnings specifically. I think FCF and ROIC are some of the best ways to measure a company.

Here we can see those low margins at play. Revenue per share is high, and the Free Cash Flow per Share is almost invisible. That is what operating a tough low-growth business with no moat will do.

For valuation, I see TITN as fairly valued. They have a lot of things to prove, and I’m not one to take it on faith that they can expand quickly with such low margins.

David and his team at TITN have a tough job of growing the company in one of the most difficult industries to be in. Low margins, harsh competition, and pressures from investors to take profits all contribute to my amazement at how far they’ve come. I will be watching in earnest to see if David, Bo, and the team start making self-serving decisions that undermine the growth of TITN long term. However, I doubt this will happen, as David has proven that his heart is in the business: founder, heavily invested, and grown the business over decades.

A strong track record of doing the right thing, but is it the right investment? Time will tell. Right now it’s a “maybe” when I’m looking for the “hell yes” investments.

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