Titan Machinery Stock: A Good Buy Despite Recent Surge (NASDAQ: TITN) – Seeking Alpha


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Investment Thesis

Titan Machinery’s ( NASDAQ: TITN ) stock has surged over ~20% post its strong Q3 earnings. The company’s sales benefited from the strong demand in the agriculture and construction segment along with acquisitions in its Agriculture business. I believe we are still near middle of the agriculture upcycle and the particular prospects of construction end markets also look good with infrastructure funding ramping up. So , the company can continue posting strong growth in the particular coming years. The valuations are attractive as well along with the stock available at a steep discount compared to the historical valuations.

Business Basics

Ti (symbol) Machinery is an authorized dealer of CNH Industrial ( CNHI ) and sells Agriculture and Construction equipment in North America and Europe. The company operates in three segments; Agriculture, Construction, and International with four principal company activities – equipment sales, parts product sales, repair and maintenance services and gear rental. In fiscal 2022, CNH Industrial supplied approximately 76% associated with the new equipment sold in its Agriculture segment, 66% of the new products bought from its Construction segment, and 70% of the brand new equipment sold in the International section. In addition to CNHI brands, the company sells plus services tools made by other brands in niche markets, which accounts for its remaining sales. The company’s second biggest supplier after CNH accounted for only about 2% of its revenue.

TITN’s Segment Revenue Distribution

TITN’s Segment Revenue Distribution (Company data, GS Analytics Research)

Equipment product sales account for approximately three-fourths from the company’s sales, and parts, services and rental combined account for around a quarter of the company’s revenue. However, the parts, services plus rental are comparatively more profitable businesses and accounts for ~60% of the particular company’s total gross profit. These businesses are furthermore recurring in nature and relatively less cyclical.

Titan Machinery Q3 FY23 Earnings

TITN recently reported better-than-expected third-quarter FY23 financial results. The revenue within the quarter was upward ~47% Y/Y to $668. 77 mn (vs. the consensus estimate of $597. 37 mn). The diluted EPS within the quarter increased ~88% Y/Y to $1. 83 (vs. the particular consensus estimate of $1. 16). The revenue growth was due to the strength in the agriculture sector and sales growth within the equipment, components, and service segments. The particular adjusted EBITDA margin in the quarter grew 170 bps Y/Y in order to 9. 5% due to the sale of higher-margin products and higher operating expense leverage. This gained the year-over-year growth within the adjusted EPS.

Revenue Analysis and Outlook

The Farming segment product sales in Q3 FY23 increased 75. 2% Y/Y in order to $493. 3 mn because of the strong need in the agriculture field. The Building segment’s sales increased 8. 4% Y/Y to $86. 4 mn driven simply by increased devices demand, partially offset by lost product sales contributions from divestitures. The same-store sales in the Agriculture and Structure segments increased 46. 4% Y/Y plus 34. 4% Y/Y. Within the International segment, income decreased simply by 4% Y/Y reflecting disruption within the particular TITN’s Ukraine business and a 14% negative FX headwind due to the weakening Euro.

In Q3 FY23, the equipment business’s product sales increased 54% Y/Y driven by solid same-store sales in the Agriculture plus Construction sections as well as the purchases of Jaycox, Mark’s Machinery, and Heartland Ag. The particular parts and services companies also saw good development and revenue increased 35% Y/Y plus 21. 7% Y/Y, respectively within the one fourth.

The inventory levels with regard to equipment have increased by $150 mn from January 31, 2022, to $474 mn, powered by the increase in new equipment inventories coming through its suppliers as well as acquisitions. The stock level regarding parts has also improved in the particular quarter from $96 mn at the end of the fiscal year 2022 to $150 mn because of the company’s efforts in order to ensure the particular availability of parts for its customers along with the purchases of Mark’s Machinery and Heartland Ag Systems. Given the strong sales inside the quarter, the apparatus inventory turn increased to 3. 6x vs . 3. 1x in Q3 FY22.

The customer requirement for new plus used equipment is continuing to outpace the supply, given the increase in net farm income. Also, the new generation of equipments is much more efficient and becoming essential for farmers given the particular rising input costs. Furthermore, the current aging fleet is benefiting the company’s parts and companies business. All these factors are driving the company’s organic growth. TITN is also doing well on M& A front. On July 2022, TITN acquired Heartland Ag Systems, which is the particular largest Case IH application equipment distributorship in The united states. Post this acquisition Ti (symbol) Machinery has the distribution rights for the entire North American Case IH, New Holland, and Case Construction product portfolio.

The Construction segment is witnessing healthy consumer demand. Furthermore, energy-related building activity in its oil and gas-producing markets in the Colorado Front Range and West North Dakota Bakken Fields remains strong. The company should also benefit from infrastructure funding-related projects from IIJA and other acts.

While the company’s Agriculture plus Construction segments are doing very well, international segment performance is somewhat weak. The particular International portion represents TITN’s business with countries such as Bulgaria, Romania, and Ukraine. The company’s European customers are benefiting from the higher global commodity prices. Further, the company is experiencing strong performance in Bulgaria and Romania and will be seeing improvements in Germany given the operational initiatives. However , the particular company’s Ukrainian customers are usually facing higher risk of interruptions and increased transportation and logistics costs. Also, dollar appreciation has been a significant headwind for this segment.

Looking forward, the management has raised its FY23 revenue development guidance range for the Agriculture segment from the previous 50% in order to 55% boost to the current 55% to 60% increase. The segment growth is benefiting from the particular acquisitions associated with Jaycox, Mark’s Machinery, plus Heartland Ag and increased demand within the sector. Management also improved the Design segment’s income guidance range from previous 5% to 10% decline to the present flat to negative 5% due in order to the better than expected third-quarter results. The particular decline in the Construction segment’s revenue is due to the divestitures of five construction machines stores within Montana, Wyoming, and Northern Dakota in January and March of 2022. According to management, excluding these divestments, the same-store sales should be up 25% in FY23. The revenue in the International section is expected to be between flat and negative 5% due to the currency headwind and uncertainty in Ukraine.

I am optimistic about the company’s prospects given higher soft grain prices, U. S. infrastructure financing ramp-up, improving the provide chain, plus higher plantation income. These tailwinds should offset the particular slowdown within residential structure. The company’s higher supply level should also support inside meeting this particular demand.

One thing which many investors are concerned about is where we are within the farming cycle and can this strong demand continue in the long term. Looking from the past cycles, In my opinion all of us are in the middle of the cycle and there is still a good chance associated with continued upswing. In the past period, industry equipment sales peaked at ~39. 9 thousand units in FY13-14 while trough occurred at ~14. 8 1000 units within FY17-18. We are currently close to 22. 6 thousand units, which gives me conviction regarding the carrier’s medium in order to long term growth prospects.

Margin Perspective

In Q3 FY23, the gross margin improved simply by 50 bps Y/Y to 20. 9%, driven primarily by stronger equipment plus parts margins. Equipment margin was supported by a $2 mn benefit from the particular annual manufacturer incentives, healthy inventories, and favorable finish markets. The pretax perimeter in the one fourth improved by 190 bps Y/Y in order to 8. 2% due to improved gross margin and working leverage due to increased levels of sales. The particular pretax perimeter within the Farming segment enhanced by 150 bps Y/Y to 8. 5%, driven by operating leverage plus the recognition of producer incentives. The Construction segment’s pretax margin improved simply by 250 bps Y/Y to 7%, powered by continuous improvement in the segment. The particular adjusted pretax margin from the International section improved by 300 bps Y/Y in order to 9. 8% due to improved margins across gear, parts, and service.

Titan Machinery gross margin and operating margin

TITN’s gross margin plus operating perimeter (Company information, GS Analytics Research)

Anticipating, the company’s margin should advantage from another $2. 5 mn in manufacturer incentives along with the product sales of higher margin components and solutions in Q4 FY23. The margins ought to also take advantage of higher working leverage specific higher sales in the particular coming quarters. Nevertheless , through a longer-term perspective, gross margins are currently higher than 5-year historical average and may correct a couple of hundred bps over the next few years to return to a lot more normalized levels.

TITN Share Valuation & Conclusion

The particular stock is currently trading at an 8. 67x P/E FY23 consensus EPS estimate associated with $4. 90, which is usually at a significant discount in order to its five-year average forward P/E of 23. 14x . The company’s income should benefit in 2023 from your easing of the supply chain constraints, higher farm income, plus an facilities funding ramp-up. In the medium to long term, I believe the agriculture up routine should continue over the next few years helping the company’s growth. On the design side too, the organization should advantage from improved infrastructure funding environment. While there are usually some concerns around the particular sustainability associated with the current margins, In my opinion they are already priced in given the stock is available with steep discount to its historical P/E multiple. Hence, I have a buy rating on the stock.