Bear of the Day: Titan International (TWI)

by

March 22, 2013 |

The industrial sector has been hot this year, always a percent or two ahead of the broad market. The reasons for optimism have been sound, from a turn-around in the Chinese economy to the US housing recovery gaining steam.

But that optimism may be cooling off and we need look no further than two big name equipment manufacturers to see it unfolding: Caterpillar (CAT - Analyst Report) and Deere (DE - Analyst Report).

And one company in the direct line of fire of a machinery slow-down could be Titan International (TWI - Snapshot Report), a global manufacturer of off-highway steel wheels and tires in the agricultural, earthmoving/construction and consumer markets.

The mining industry, from metals to iron ore, has also seen earnings and outlooks take a hit recently, with names like Cliffs Natural Resources (CLF - Analyst Report) and Joy Global (JOY - Analyst Report) being sold as estimates soften. The gold miners are currently one of the lowest ranked industry groups in Zacks classification of 265 industries.

Titan generally manufactures both wheels and tires for these markets and provides the value-added service of assembling the completed wheel-tire system.

They offer a broad range of different products that are manufactured in relatively short production runs to meet original equipment manufacturers' specifications and/or aftermarket customer requirements.

Earnings Picture Rolling the Wrong Way

Despite reporting record annual results on February 25, 2013, the hiccup in Titan's growth outlook had been foreseen by the analysts since early this year. And missing the fourth quarter consensus EPS estimate of 47 cents by 80% didn't help.

Here's the view from the Zacks proprietary Price & Consensus chart...

Since that earnings report, the Zacks Consensus Estimate for 2013 has dropped by 10.4% to $2.41 per share while that for 2014 plummeted 16.6% to $2.75 per share.

It's worth mentioning the record revenue picture here too. Revenue of $493.6 million represented a 22.5% improvement over the year-ago quarter. The impact was, however, negated by a 28.4% increase in cost of sales that led to a 12.0% fall in gross profit, and a big drop from the year-ago quarter's 37 cents EPS.

Where the Big Wheels Meet the Dirt

Decreasing earnings estimates together with a mixed bag of both positive and negative earnings surprise for the past year -- producing an average of miss of -9.6% -- raises skepticism over Titan International's performance in the quarters ahead.

Titan is still projected by some analysts to have mid-teens earnings and sales growth. But until the estimate picture stabilizes, it's probably best to stand aside. Watching how CAT and DE estimates shake out would be a good idea too.

Kevin Cook is a Senior Stock Strategist with Zacks.com

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