Imagine a company -- let's call it A -- that significantly depends on company B for revenue, has zero presence outside the U.S. and Europe and has never paid dividends. Perhaps you wouldn't give A's stock a second look.
What if I tell you that company B is the world's second-largest farm-equipment company, next only to Deere (NYSE:DE), and that A is one of its largest dealers in the world? Company A's case gets considerably stronger.
It gets even better if you know that A's stock is trading at a compelling 10 times earnings after having shed a massive 36% year to date. Now that looks like a bargain, which is why you should certainly read along.
The big advantage. Or is it?
Titan Machinery (NASDAQ:TITN) is the company I am talking about. Nearly 82% of the agricultural equipment and 64% of the construction equipment that Titan sold in its financial year ending January 31 came from the CNH Global (UNKNOWN:CNH.DL) house. Yes, you guessed it: CNH is next only to Deere when it comes to leadership in the farm-equipment industry.
Naturally, Titan has an enviable position as the world's largest retailer of CNH's Case IH agricultural equipment brand and North America's biggest dealer of Case construction equipment.
Sadly, Titan's growth story ends there.
No, CNH isn't enough
By now, you know that Titan's growth largely hinges on CNH's expansion plans. To that end, CNH has an impressive global presence -- Its equipment had reached 170
countries by the end of 2012. Furthermore, 31% of CNH's net equipment sales in 2012 came from the region constituting Europe, Africa, Middle East, and Commonwealth of Independent States, 15% came from Latin America, and 10% was attributed to the Asia-Pacific region.
In short, international markets contributed a whopping 56% to CNH's total revenue. That's way ahead of industry leader, Deere's 36% share of revenue from markets outside the U.S. Only AGCO (NYSE:AGCO), which is the third in line in the farm-equipment industry, derived nearly three-quarters of its revenue outside the North American market last year.
The problem is that Titan has yet to venture outside the U.S. and Europe. So no matter how far CNH spreads its wings, Titan will basically have nothing to gain. That leaves Titan at the mercy of demand for equipment in the U.S. and European regions, which is certainly not the best thing to happen to a company when it has to compete with dealers that stock equipment of stalwarts like Deere and Caterpillar (NYSE:CAT).
It's a daunting task ahead
CNH's scale of business is hard to match up with that of Deere or Caterpillar. For perspective, Deere generated revenue worth $27 billion
from its agriculture division while Caterpillar derived nearly $20 billion in sales from its construction-equipment business in their respective last financial years. CNH's total equipment revenue for 2012 was just about $19 billion.
Both Deere and Caterpillar are also known for their strong research and development initiatives to regularly roll out innovative and advanced machines. While they spent 4.3% and 3.7% of net sales, respectively, on R&D last year, CNH kept it relatively low at 3.4% of sales.
Naturally, CNH's equipment doesn't command the attention that a Deere tractor or a Caterpillar loader has. Consequently, as fellow Fool Dan Caplinger rightly pointed out, Titan faces an uphill task selling equipment even in its primary market.
The real challenge
To that end, Titan is doing surprisingly well given the challenges. Its last-quarter revenue jumped 19% year over year. More importantly, same-store sales improved 9.6 %.
Unfortunately, Titan lowered its full-year guidance as challenges continue to intensify in the agriculture as well as construction segments. While it is an industrywide problem, things are particularly difficult for Titan because 52% of the prevented planting acres for corn and soybeans this year unluckily fall under Titan's region of operations. That's a huge number, because prevented planting refers to those areas that farmers could not plant this season because of a natural disaster. That means lower production in those areas and hence lower farm income and demand for farm equipment.
Despite the headwind, Titan expects an 11% growth on its full-year top line at the higher end of its projection. That's commendable, but I wished Titan could convert those incremental sales into profits. Unfortunately, that doesn't seem to be the case -- Titan expects its net income for the full year to be at least 24% lower than last year. If things get really bad, profits could slump 40% year over year.
The Foolish bottom line
So now you know how costly Titan's limited footprint can be, and that's also the major reason why its shares will perhaps find it difficult to attract investors in hordes.
The company is losing out on the huge mechanization opportunity that's emerging in the developing markets even as competition intensifies in the domestic market. So I certainly don't classify Titan as a growth stock.
Fool contributor Neha Chamaria has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.