Focus Article: Titan International Inc. (TWI)

Titan International Inc. (TWI) $29.05

The Company:

Titan International is a manufacturer of wheels and tires for a wide variety of off-road equipment. The company traces its roots back to the Electric Wheel Company in Quincy, Illinois, which was founded in 1890. After a number of acquisitions and joint ventures, the company was renamed as Titan Wheel International in 1990 and started trading as a public company in 1993.

Titan’s primary markets include agriculture, earth moving/construction and consumer products. The consumer segment, which makes products for ATVs and trailers, jumped from $15.37 million in sales representing just 2% of total sales in 2010 to $219.48 million in 2011, representing 15% of total sales of $1.49 billion. The company has a strong customer base, with John Deere and CNH representing 18 percent and 11 percent of total sales respectively, with no other customer accounting for more than 10% of sales. Their “Big Daddy” giant tire, which is used in mining operations, is approximately 13 feet tall and weighs in at approximately 12,500 pounds.

Over the years Titan has grown through a number of acquisitions. Some of the major acquisitions in the recent past were the acquisition of Goodyear’s North American farm tire assets in 2005 and the acquisition of the off-road tire assets of Continental Tire North America, Inc. in 2006. In April 2011, Titan acquired Goodyear Tire & Rubber Company’s Latin American farm tire business in Sao Paulo, Brazil and in late 2011, the company completed the acquisition of Goodyear’s Union City, TN plant where they purchased the land, building and mixing equipment. Titan International has a trademark license agreement with Goodyear through which it can manufacture and sell certain off-highway tires in North America and Latin America under the Goodyear name. The Goodyear brand is helping the company increase its visibility and the license for the brand has been prepaid for seven years as part of the Goodyear Latin American farm tire acquisition.

Titan International has been seeing an increase in revenue and earnings on both yearly and quarterly basis. In 2011, the demand for their wheels and tires was so high that they saw their largest backlog in the company’s history. This increase in demand for Titan’s wheels and tires derives from high farm demand and the energy exploration boom in the U.S. and Canada. Titan expects to reach a revenue “run rate” of between $3 billion to $4 billion by the end of 2013, which is more than twice their 2011 revenue.

Business Statistics & Financials:

In 2011, Titan’s agricultural market sales represented 64% of net sales, the earth moving/construction market represented 21% and the consumer market represented 15% of net sales. The Company recorded total sales of $1.49 billion for the full year 2011, representing growth of 69% when compared to 2010 sales of $881.6 million.

For the first quarter of 2012, the company reported revenue of $463.1 million, up 65% YoY and 15% over Q4 2011. The increase in sales was primarily driven by a combination of higher demand, acquisitions and high raw material prices, which was passed on to customers. Improving gross and operating margins helped the company post a 118% increase in operating income of $58.7 million.

Titan’s tire business is cyclical where the first two quarters of the year are stronger because farmers tend to order tires before the start of the growing season. The company has been concentrating on the tire aftermarket, which is often larger, less cyclical and offers higher profit margins (think Gamestop for tires).

The company trades for 6.36 times EBITDA and has a forward P/E of 9.37. Tital has $188.6 million in net debt on its balance sheet but the balance sheet appears to be strong.

Competitors:

Some of Titan’s competitors include Carlisle Companies Incorporated, GKN Wheels, Topy Industries, Ltd. , Bridgestone/Firestone, Michelin, Pirelli and certain other foreign competitors. While some of the companies listed below are not direct competitors, they provide a feel for the multiples other companies in this space are trading for.

Insider Buying:

One insider purchased stock on the open market over the last six months as listed below. You can view a list of all insider transactions for Titan International Inc. here.

As mentioned in our daily update last week, Mr. Cashin has served as an independent director of Titan since 1994 and according to his profile, he is “Managing Partner of One Equity Partners LLC, which manages multi-billion dollar investments and commitments in direct private equity transactions for JP Morgan, where he is a member of the Executive Committee.”

Risk Factors:

Some of the risk factors Titan faces include higher raw material prices for rubber and steel, currency risk following their Latin American acquisition and union contracts.

The company managed to effectively pass on higher rubber prices to customers last year and could potentially do so in the future. However the strong U.S dollar when compared to the Brazilian Real and other currencies could put pressure on earnings as the company has been expanding internationally.

34% of the company’s workforce is unionized and another 26% are currently out of contract. Should the company not reach an agreement with its workforce, it could potentially disrupt production during a period of high growth and order backlogs.

Conclusion:

Titan fits the growth-at-a-reasonable price (GARP) bill perfectly with rising revenue, rising margins and a reasonable valuation to boot.