Seeking Alpha: Titan Machinery - Is This Roll-Up Rolling Over?

I've had my doubts about Titan Machinery (TITN) for a while now, as I've seen more than a few debt-funded equipment dealership roll-up stories in the past, and they often don't end well. To that end, the last year and two years have been pretty dicey for buy-and-hold investors, as concerns about the health of the agricultural equipment market and the potential for a rebound in construction equipment demand weigh on sentiment.

As it stands today, I have very mixed feelings about this business. I do have some concerns about the health of the ag equipment sector in the coming years, and I have real doubts about Titan's ability to leverage CNH Global (CNH) construction equipment into a viable construction equipment dealership business. On the other hand, it seems harsh to say that the company creates no value at all, and it trades only about 5% above tangible book value. I'd rather play a bullish (or bullish relative to consensus) call on agriculture and/or construction through names like Deere (DE), Caterpillar (CAT), Kubota (KUBTY.PK), or Komatsu (KMTUY.PK), but Titan's underperformance makes it hard to be loudly bearish on the name.

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Titan Machinery - Is This Roll-Up Rolling Over?

Investopedia: Easy To Like Everything About Kubota Except The Price

There's a lot working in Kubota's (OTC:KUBTY) favor these days. The lower value of the yen makes its products cheaper, while rising incomes across Asia make its agricultural equipment more attainable. Add to that a recovery in the U.S. housing market (where the company sells a lot of lawn equipment) and a stated goal to expand the dry land business, and there are multiple attractive growth drivers. The problem? It's just not possible to run an attractive valuation on a discounted cash flow basis, and I can't reconcile the idea of paying a 40% to 100% premium (in forward EV/EBITDA terms) for Kubota compared to Cummins (NYSE:CMI), Deere (NYSE:DE), AGCO (Nasdaq:AGCO), or CNH (NYSE:CNH).

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Investopedia: Deere May Be Getting Too Little Credit

The ways things are in the market today, whenever I see an industrial stock that seems to be undervalued by 15% or more, I start wondering what I missed or did wrong in my modeling. While I do believe the North American ag equipment market may well go negative next year, I think the Street may be too down on Deere (NYSE:DE) shares. A combination of weak ag next year and no real construction recovery in sight is grim, yes, but it seems as though investors have been a little gentler with Caterpillar (NYSE:CAT) and Cummins (NYSE:CMI) through their downturns. I'm hesitant to buy into what looks like a bearish and skeptical tape, but Deere is starting to creep up the ranks of my list of value-priced quality stocks.

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Investopedia: Even With Steady Guidance, Titan Machinery Has A Lot To Prove

At the risk of drifting into broken record territory, it's very difficult to generate real long-term economic profits from distribution and dealership businesses. By and large, these are business with razor-thin margins, low returns on assets and capital, and significant cyclicality. Maybe Titan Machinery (Nasdaq:TITN) will be the exception, and maybe the company's aggressive dealership roll-up strategy will lead to strong synergies, margin leverage, and cash flow generation. This is a risky play, though, and investors who really want to play trends like agriculture or a construction recovery would likely be better off with the original equipment manufacturers.

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Investopedia: Titan Machinery's Margin Problem

Although I have mentioned it before in previous articles on Titan Machinery (Nasdaq:TITN), it bears repeating – Titan Machinery is pursuing a risky, debt-fueled roll-up model that puts a premium on driving solid long-term operating leverage. This makes the company's fourth quarter miss all the more concerning. While I'm the last person to advocate freaking out (or abandoning a position) over one bad quarter, the long-term impact to fair value of even a half-point adjustment to margin estimates can be significant.

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Seeking Alpha: Quirky Raven Has The Quality, But Not So Much Value

The word quirky probably doesn't do justice to Raven Industries (RAVN), as this small conglomerate is a leader in such disparate markets as reinforced plastic sheeting, GPS-based controls for agricultural equipment, and high-altitude balloons. While Raven has consistently generated strong returns on capital, the free cash flow hasn't been as consistent or impressive. With meaningful exposure to markets like energy and government and what looks to be a premium valuation, I think investors may do better to wait before making a major commitment to Raven with their own capital.

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Quirky Raven Has The Quality, But Not So Much Value

Seeking Alpha: Deere: Mayan Apocalypse Never Materialized, But Mind The Valuation

Given what we've heard recently from companies like Deere (DE), Caterpillar (CAT), Monsanto (MON), Eaton (ETN), and Joy Global (JOY), it looks like it's better to serve the overall-wearing community (farmers) as opposed to the hardhat-wearing community (construction and mining). Deere delivered pretty strong performance from its ag business once again, and though management is often conservative it looks like 2013 will be a solid year. That said, Deere is one of those well-loved industrial stocks, so investors shouldn't turn a blind eye toward valuation.

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Deere: Mayan Apocalypse Never Materialized, But Mind The Valuation

Investopedia: Fiat Finally Convinces CNH To Seal The Deal

The laws and regulations that govern mergers and acquisitions (M&A) in Europe are a fair bit different than those in the United States, particularly as they relate to minority shareholders. Similar to how Alcon ultimately secured a better offer for shareholders, despite the fact that Novartis (NYSE:NVS) already owned more than three-quarters of the company, CNH Global (NYSE:CNH) has succeeded in obtaining better terms from Fiat Industrial (OTC:FNDSF) - a company that incorporates most of the non-auto businesses of Fiat (OTC:FIATY) for the 12% stake that Fiat did not already own.

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Seeking Alpha: Cautious Optimism Seems To Suit Deere

When last I wrote about Deere (DE), I worried that aggressive growth assumptions might be setting investors up for a correction. Since then, the stock has dropped about 10% - helped, I'm sure, by the growing worries about seemingly every economic region outside of North America.

I still have my worries about whether North American farm demand is peaking and whether emerging markets like Brazil, Russia, India, and China can take up the slack. Although these shares are looking increasingly attractive from a cash flow perspective, sentiment and fears of further economic sluggishness are risk factors well worth considering.

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Cautious Optimism Seems To Suit Deere

Investopedia: Deere Keeps On Running

Investors looking at the results from machinery and component companies like Caterpillar (NYSE:CAT), Cummins (NYSE:CMI) or Deere (NYSE:DE) may think there's a bottomless demand for heavy-duty equipment these days. To be sure, strong agricultural markets are encouraging farmers to spend on equipment, while a torrid pace of construction in the developing world is likewise gobbling up machinery almost as fast as its manufactured. Deere is just as cyclical as it has always been, but investors optimistic on ongoing global growth may yet have more to reap here. (To know more about cyclical stocks, read: Cyclical Versus Non-Cyclical Stocks.)

A Powerful End to a Successful Year  
Deere reported 20% revenue growth for its fiscal fourth quarter, as modest price increases coupled with double-digit tonnage growth drove a successful result. Sales in the large agriculture and turf business were up 18%, while the construction business saw 34% growth on 37% tonnage growth. Although growth outside the U.S. and Canada was much stronger (27% in constant currency), homegrown growth of 14% was hardly poor.

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Investopedia: Cummins Keeps It Coming

Trucks, drilling rigs, bulldozers and longwall miners all share at least one thing in common - they're worthless without a good engine powering them. As companies as diverse as Caterpillar (NYSE:CAT), Joy Global (Nasdaq:JOYG), Komatsu (Nasdaq:KMTUY) and CNH (NYSE:CNH) continue to report strong demand and backlogs, engine specialist Cummins (NYSE:CMI) is leveraging this into exceptional profits.

New Quarter, Old Story  
There is only so much a writer can do to make the Cummins story sound fresh after so many similar quarters. For the second quarter, Cummins reported that sales climbed 45% and exceeded the upper end of the Wall Street analyst range. Company revenue was pushed along by 53% growth in engines (which is close to two-thirds of sales), but 42% growth in components, 28% growth in power generation and 36% growth in distribution were nothing to cry about either. 


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Investopedia: Keep An Eye On This Titan

No one knows when the next run in agriculture is going to start, or if the last one is truly over yet. After all, some of the high crop prices last year were certainly due to a spate of bad harvests, and favorable weather could deliver a bumper crop this year. Then again, a large amount of the U.S. corn crop is going to ethanol, food demand is ever-growing and natural disasters are a "where" not "if" question. 

When agriculture runs, investors turn to fertilizer stocks like Potash (NYSE:POT), equipment companies like Deere (NYSE:DE), seed companies like Syngenta (NYSE:SYT), and ETFs like PowerShares Agriculture (NYSE:DBA) and MarketVectors Agribusiness (NYSE:MOO).

Perhaps investors should add Titan Machinery (Nasdaq:TITN), the leading dealer of CNH Global's (NYSE:CNH) Case and New Holland agriculture and construction equipment, to their watch lists. Not only is this a viable play on agriculture equipment demand, but it gives investors exposure to a recovery in construction equipment demand (whenever that may happen). 

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