Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Titan Machinery (TITN -0.82%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Titan's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at Titan's key statistics:
TITN Total Return Price data by YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
135.2% |
Pass |
|
Improving profit margin |
(31.2%) |
Fail |
|
Free cash flow growth > Net income growth |
(37.9%) vs. 62% |
Fail |
|
Improving EPS |
38.5% |
Pass |
|
Stock growth (+ 15%) < EPS growth |
(18.5%) vs. 406.5% |
Pass |
Source: YCharts. * Period begins at end of Q3 2010.
TITN Return on Equity (TTM) data by YCharts.
|
Passing Criteria |
3-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
(20.8%) |
Fail |
|
Declining debt to equity |
63.6% |
Fail |
Source: YCharts. * Period begins at end of Q3 2010.
How we got here and where we're going
Titan doesn't come through with flying colors, as it's mustered only three out of seven possible passing grades today. One source of that weakness is the company's falling free cash flow, but a falling profit margin also hurt the company on two assessments. Still, Titan's bottom-line growth has been quite impressive in recent years, and there are ample opportunities for the company to produce a better score over the course of this year. Will Titan be able to improve on its weaknesses, or will the equipment retailer be tarnished for some time to come? Let's dig a little deeper to find out.
Titan Machinery posted lower-than-expected revenue and earnings per share for its latest quarter due to challenging business conditions in both agricultural and construction markets. Fool contributor Lee Samaha notes that Titan's agriculture and construction dealerships faced a multitude of issues in 2013, including cutthroat pricing competition from agricultural machinery giants Deere (DE -0.20%), Caterpillar (CAT -1.11%), and AGCO (AGCO -0.82%). CEO David Meyer pointed out that the company has also been trying (with difficulty) to pass the costs for making its machinery Tier 4 emissions standards compliant to customers, which helps explain the weakening margins you saw earlier. As a result, Titan lowered its full-year earnings guidance for both fiscal 2013 and 2014, citing antagonistic weather conditions impacting the seasonal nature of its business.
Conversely, Deere has already enjoyed strong demand for machineries with Tier 4 emissions standards, which are only applicable to non-road diesel engines introduced between 2008 and 2015. However, Deere has forecast a 3% decline in total sales for 2014 due to weakening demand for agricultural machinery. Meanwhile, AGCO's inventories rose by more than $300 million to more than $2 billion by the end of 2013, which seems likely to cause oversupply and pricing problems in the agricultural machinery market. Titan is already plagued by excessive used-equipment supplies in its agricultural segment, and weak prices for corn and soybean have also held back farmers from purchasing new Tier 4 equipment.
Longbow Research recently downgraded the agriculture and construction equipment retailer from hold to sell after the company revised its outlook down for fiscal 2014. Additionally, investors seem worried about Titan's sales growth, which is largely tied to CNH Industrial (NYSE: CNH) equipment -- both Deere and Caterpillar boast superior brand recognition to CNH among potential consumers. However, Titan now has access to an extensive line of trucks and other specialized vehicles in the wake of CNH Global's merger with Fiat Industrial late last year. This more diversified product line, combined with a stock that trades at a significant discount to book value of $19, offers investors what seems like a very attractive entry point, particularly if business should improve more than anticipated over the coming year.
Putting the pieces together
Today, Titan Machinery has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
