Is Titan Machinery the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Titan Machinery (Nasdaq: TITN  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Titan Machinery.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

39.5%

Pass

 

1-Year Revenue Growth > 12%

46.3%

Pass

Margins

Gross Margin > 35%

16.3%

Fail

 

Net Margin > 15%

2.4%

Fail

Balance Sheet

Debt to Equity < 50%

174.5%

Fail

 

Current Ratio > 1.3

1.38

Pass

Opportunities

Return on Equity > 15%

12.7%

Fail

Valuation

Normalized P/E < 20

12.11

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

 

 

 

 

 

Total Score

 

4 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With four points, Titan Machinery has a lot of room for improvement. The construction equipment seller has posted amazing growth in recent years, but thin margins have kept it from turning those sales into higher profits.

Titan Machinery is a retailer that specializes in agricultural equipment. With the farming industry enjoying high prices, boom times have given farmers more money to spend. That's been good news not only for big agricultural stocks like equipment maker Deere (NYSE: DE  ) and seed-seller Monsanto (NYSE: MON  ) but also for companies like Titan that actually sell farmers the goods they need.

Moreover, Titan has succeeded in the U.S. market, which has left many of its competitors reeling. Caterpillar (NYSE: CAT  ) , for example, has seen huge growth in its Asia Pacific sales, but U.S. revenue has fallen by a quarter in the past four years. By contrast, Titan sales in the U.S. have nearly quadrupled.

Titan's stock, however, hasn't always responded to its success the way you might expect. Yesterday, for instance, Titan shares fell as much as 16% intraday even after the company reported better-than-expected 48% revenue growth, earnings per share that doubled year-ago levels, and improved guidance for the rest of 2011.

With no dividend, a debt-heavy balance sheet, and low retail margins, Titan has plenty of work to do to improve itself. If agriculture continues to boom, however, Titan could make a lot of progress toward perfection in the years to come.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Titan Machinery to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Motley Fool newsletter services have recommended creating a synthetic long position in Monsanto. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

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  • Report this Comment On September 14, 2011, at 5:07 PM, Buysider wrote:

    Caterpillar U.S. sales have fallen while Titan Machinery’s U.S. sales have risen because they are in different industries. Titan sells farm equipment , which has been strong, while Caterpillar sells construction and mining equipment, which in the U.S. has been weak, but is recovering. The article seems to assume that Caterpillar sells farm equipment. It does not. In any event, given Caterpillar’s current record sales and earnings, I would not characterize the company as “reeling.”

    Caterpillar has not had a presence in the farm equipment business since 2002.

    Caterpillar makes construction and mining equipment and also diesel engines for a variety of markets. Caterpillar sells small construction equipment that is used for land clearing, earthmoving, and material handling on farms, but that is a tiny portion of its business. Caterpillar does not make or sell farm tractors, combines, or other equipment used primarily for farming.

    Some of Cat’s independent dealers sell farm equipment, but that equipment is obtained from other manufacturers and carries their brands.

    It’s an understandable error, as there is a widespread misconception in the media and among investors that Caterpillar is in the farm equipment business. One can find a great many media articles and references that erroneously say that Caterpillar makes farm equipment. However, it does not.

    At one time, Caterpillar did make rubber-tracked farm tractors using a rubber-track technology it developed and introduced in 1987. At its best, that business represented less than 5% of Caterpillar’s sales. Caterpillar sold its rubber-tracked farm tractor line (called the Challenger) to AGCO in 2002.

    Some independent Cat dealers sell AGCO-made Challenger rubber-tracked tractors for farming and earthmoving uses. Some of those carry the Cat brand, but they are manufactured by AGCO for sale to Cat dealers, so Caterpillar itself receives no economic benefit from their sale, except as it strengthens its dealers vis-à-vis competitors’ dealers in the region.

    Caterpillar DOES compete with Deere, but only in Deere’s construction and forestry equipment line, NOT in Deere’s farm equipment line.

    For confirmation of the above, check with Caterpillar’s Director of Investor Relations, Mike DeWalt, at 309-675-4548, or its head of Corporate Public Affairs, Jim Dugan, at 309-494-4100.

    I’ve followed Caterpillar closely for 38 years, until last year on the sell side of the Street.

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