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Has Titan Machinery Become the Perfect Stock?

Dan Caplinger
September 11, 2012

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.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 41.5% Pass
  1-Year Revenue Growth > 12% 42.3% Pass
Margins Gross Margin > 35% 16.5% Fail
  Net Margin > 15% 2.3% Fail
Balance Sheet Debt to Equity < 50% 243.3% Fail
  Current Ratio > 1.3 1.46 Pass
Opportunities Return on Equity > 15% 12.9% Fail
Valuation Normalized P/E < 20 8.96 Pass
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

Since we looked at Titan Machinery last year, the company has kept its four-point score. But the equipment maker has had a tough summer as fears about the strength of the overall economy have weighed on its industry.

As a retailer primarily of agricultural equipment, Titan has benefited greatly from high crop prices and generally excellent results from farmers, especially in the U.S. market. In order to make the most money, farmers rely on top equipment, and that's driven revenue growth for Titan for several years now. Although agriculture equipment makes up about 85% of its total revenue, Titan also does business in the construction equipment segment as well.

Yet success in the industry has made competition ever fiercer. Deere (NYSE: DE &nbs