Author Topic: TITN - Titan Machinery  (Read 716 times)

cma_atk

  • Newbie
  • *
  • Posts: 3
TITN - Titan Machinery
« on: February 16, 2017, 12:42:58 PM »
Hello all,
Longtime lurker here who finally made the leap to full membership. I have just started working on a new idea that I wanted to run by you guys. To give you some brief background, I really latched on to a point in Einhorn's latest letter where he highlighted that he was short CAT:

"Every time someone says “infrastructure investment,” investors reflexively buy certain stocks including CAT. Yes, CAT sells machines that are used in infrastructure, but this represents only a small part of its business. CAT’s biggest segments are mining and energy. We just completed a once-in-a-generation boom in iron ore mine development, and horizontal drilling means we can produce more oil with fewer rigs."

I have been exploring this theme in the small cap space, and one name I found interesting was Titan Machinery. For context, Titan is a heavy machinery distributor that sells new and used agricultural and industrial equipment and parts, as well as offering repair and maintenance services. Their new equipment and parts are primarily supplied by CNH. The agricultural segment provided about 2/3 of 2015 revenue.

While I just began the work here, it seems that this company has been quite a dumpster fire over the last four or so years. Massive inventory management problems have led to used equipment impairments and heavy financing burdens as the company struggles to move product. As a result, the company has incurred heavy losses and traded down from $36/share in early 2012 to around 8$ at a couple points in 2016. However, the stock doubled after the election, and currently trades at ~$14/share. Last week the company announced a restructuring plan to close 14 under performing agriculture equipment dealerships, in hopes of saving ~$25 million annually. The restructuring is supposed to be completed by the first half of the fiscal year, and cost targets are illustrated in the recent 8-K (attached). 

I think this might be a short at this price. The near-term USDA farm revenue predictions are relatively flat from 16 to 17, and if you buy Einhorn's view re: CAT then the industrial segment is also not likely to grow drastically. While my view is still preliminary, the management team inspires zero confidence, having missed revenue and earnings projections with remarkable consistency and botching WC management for a number of years now. As a result, I don't have a ton of faith in this restructuring plan. While I don't think this is a zero, I can't really get my head around the post-election jump.

Anyone done work on this name?

Thanks!


« Last Edit: February 16, 2017, 12:54:20 PM by cma_atk »

solobz

  • Newbie
  • *
  • Posts: 10
Re: TITN - Titan Machinery
« Reply #1 on: February 17, 2017, 07:50:07 AM »
I've done work on it in the past, and you're right that it's not a great company. The company's a child of the ag boom, and that's the mentality management has. Growth oriented, indiscriminate store acquiring as the consolidator. I never got the impression they're ever made any real improvements in the stores. Also as you said, management doesn't really inspire confidence that they'll be able to flip the switch from growth to restructuring. Throw in all the industry headwinds, farm income, farm land values, commodities still lower...and you have dead money as a long. Idk if it's necessarily a short, but upside risk seems pretty contained.

cma_atk

  • Newbie
  • *
  • Posts: 3
Re: TITN - Titan Machinery
« Reply #2 on: February 17, 2017, 08:27:50 AM »
Really appreciate the response, solobz. Definitely on the same page in every regard -- not sure it is a great short (still going to do some more work) but definitely don't think there is much risk on the upside.

I suppose my gut is that if/when management misses projections and overruns cost estimates on this reorg plan, the stock should come back to earth a bit as people are forced to reconsider all of the flaws you highlighted. Given they expect the plan to be implemented by the end of Q2, it could be a low-risk, medium-reward trade that is essentially a short-term bet on the continued incompetence of management. Again, though, will have to do more work and figure out exactly what is priced in here.