Buy Titan International (TWI)
07/01/2011 2:34 pm EST
In 2007 Titan International (TWI) was one of the hottest stocks in the commodity sector, climbing 55%, as the company couldn’t make tires fast enough to meet demand in the mining sector.
The stock plunged in 2008—falling 67%--before recovering (and how—up 141%) in 2010. The shares are up 41% in 2011 to date but down 11.4% in the last month.
Buy on the dip?
Depends on how long you think the demand for the tires that go on the big trucks that haul coal and iron ore will last. Prices for the huge tires that go on Caterpillar trucks, for example, have climbed to $100,000 on the spot market. In the last boom Barrick Gold reported spending $60,000 for a tire on its largest trucks.
In the first quarter of 2011 Titan International set new records or revenue at $280 million (up 43% from the first quarter of 2010) and for operating income (excluding one time charges for exchanging convertible debt for stock) at $27 million (up 166% from the first quarter of 2010). That kind of growth makes the stock’s trailing 12-month price to earnings ratio of 221 look reasonable. At a projected growth rate of 185%, the forward price-to-earnings ratio on projected earnings is just 16.9.
No doubt that the mining business tends to boom or bust—but actually 75% of Titan International’s revenue in the first quarter came from its farm tire business. That business too is cyclical but right now it looks like the farm sector is in for a relatively long period of high commodity prices and strong farm income. Sales growth in just that section came to 39% year-to-year in the first quarter of 2011. The company just spent $99 million to acquire Goodyear’s Latin American farm tire business. That deal closed in April 2011.
Sales of tires for mining and construction equipment grew faster, though, at 59% in the first quarter, and there’s no doubt that the odds that Titan International shares will move from $24.27 sat the close on June 30 back above the 50-day moving average at $25.75 and then to something like the 52-week high at $31.42 depends on demand from that sector lasting for a while at current growth rates.
In its first quarter 10Q filed with the Securities & Exchange Commission the company said it will. Sales, the company expects, will continue for the rest of 2011 at first quarter levels. That would put sales growth at 22% year-to-year in the second quarter and produce 59% growth in operating income.
A report from PricewaterhouseCoopers on the mining industry supports Titan International’s optimism. According to the report, the world’s top 40 mining companies plan to spend $120 billion on building or expanding operations this year.
That would be about double what the companies spent last year, PricewaterhouseCoopers calculates. The company says it will. Matching first quarter 2011 sales and operating income in the second quarter would result in 22% year-to-year sales growth and a 59% jump in operating income.
I’m adding Titan International to Jubak’s Picks today, July 1, with a target price of $31 a share by December 2011.
Full disclosure: I do not own shares of any stock mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Titan International as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/