Image source: Getty Images.

Demand for giant tires hasn't quite turned around for Titan International Inc (TWI 1.99%) but the company thinks it's just a matter of time. Financial results from the third quarter 2016 released Thursday, November 3, 2016, added color to both the big tire market struggling and the improvements management has made adjusting to market realities. Despite these current difficulties, there may be some bullish signs ahead.

Titan International Inc results: The raw numbers

Metric

Q3 2016 Actuals

Q3 2015 Actuals

Growth (YOY)

Sales

$306.2 million

$308.8 million

(0.9%)

Net Income

($11.3 million)

($42.5 million)

(73.4%)

EPS

($0.21)

($0.79)

(73.4%)

Source: Titan International Q3 2016 earnings release.

What happened with Titan International this quarter?

The general theme in the quarter is that Titan International's business is slowly starting to get better. The market in general "continues to bounce around the bottom of this four year down cycle" and management is adjusting costs accordingly. That should provide upside when the business improves. Here are a few key takeaways from the earnings release.

  • Gross margins rose to 10.8% from 8.5% a year ago. This points to the cost cuts Titan International has made to make the business more competitive in the last few years.
  • SG&A costs did tick up slightly from $35.5 million a year ago to $36.3 million, or 11.9% of sales.
  • A big positive is that a study on LSW Super Single tires showed a 3% per acre increase in soybean production, which could make the sales case for the product very simple because the new tires will mean more money in farmers' pockets.
  • Potential sales of ITM and the Titan Tire Reclamation Corp. are progressing but there's nothing immanent in either business. If those sales do happen they could help reduce the $501 million in debt on the balance sheet.

What management had to say

The big question facing Titan International is around the macro recovery in tire sales, both from new tractors and replacement tires. CEO Maurice Taylor summed up the market like this:

If this next quarter ends up close to last year, then I believe it shows we've made it through the cycle. I've talked to a lot of dealers and farmers during this past quarter. I hear more and more of them with a positive outlook which is what it will take to move our business forward. I'm looking forward to Titan being stronger than ever as we start our climb back up.

Given the cost reduction Titan International has made it will give a lot of leverage to the business when demand improves. And management sees the market improving fairly soon.

Looking forward

With Titan International's shares trading at nearly quadruple their 52-week low, it's important to keep in mind that even a falling share price is still way off its lows and expectations are rising for the company. So, the reaction of traders short-term should be put into context of the company's long-term potential and the progress that has already been made. 

An operational recovery appears to be in the offing. Not only that but, according to management, there's a lot of leverage in the business. Just one caveat, however: This recovery may be lumpy and may not really show up on financial statements until some time in 2017. For long-term investors, this shouldn't be an issue, as long as the market trends are indeed bouncing off the bottom right now.