An Unusual Way to Play Ag Growth
08/02/2012 11:45 am EST
More mouths to feed means more creative ways to grow crops, but there's still only one way to harvest those crops, notes Gregory Dorsey of The Complete Investor.
It’s not often you come across a relatively small company with a commanding position in the markets it serves, but that’s the case with Titan International (TWI), a tire company that joins the Small-Cap Portfolio this issue.
With a modest market capitalization of just over $1 billion, Titan nevertheless has a better than 40% share of the North American market for off-road tires, and more than 75% of the market for off-road tire rims. Its tires span the gamut in terms of size, including ones that are two stories tall for use with massive earth-moving trucks.
The company sells products under the Titan and Goodyear Farm brand names in the aftermarket and to original equipment manufacturers. Its customers include Deere, Caterpillar, Terex, Kuboata, and Volvo, to name just a few.
About two-thirds of Titan’s sales come from the agriculture market, which has been the primary source of growth for the company in recent years. But in the next several years, the biggest growth driver will likely be the mining and energy sector.
Earth-moving equipment for use in the Canadian oil sands market in particular is likely to be in great demand. Production in the tar sands, while not likely to live up to projections, should nevertheless expand rapidly in the coming years, which will be a boon for the company.
Titan also serves the consumer market, making tires for all-terrain vehicles, trailers, and campers, a steady if unspectacular niche.
North American sales make up nearly 80% of Titan’s revenues. But South America, particularly Brazil, offers excellent growth potential for the company as well. The company is also likely to take advantage of the economic disarray in Europe by acquiring one or more companies serving that region.
Like so many other stocks, Titan’s shares were pummeled during the 2008-2009 financial crisis when credit was unavailable and demand for its products fell off a cliff. Management has done an excellent job of navigating difficult waters since then, however.
In the most recent quarter, for instance, Titan operated at record-high margins, thanks in part to a zealous focus on cost controls, but also because of rapidly rising volumes. Titan’s sales should reach $1.8 billion this year, up from $648 million just five years ago. And management expects that figure will double in the next couple of years.
In the meantime, the company is generating copious amounts of free cash. For now, though, it pays only a token dividend, preferring instead to use the funds to grow the business. Trading at eight times projected 2011 profits, the stock is cheap, especially given that the company’s growth rate is likely to be in the mid teens in the next several years.