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Bear of the Day: Titan International (TWI)

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Titan International, Inc. (TWI - Free Report) , a Zacks Rank #5 (Strong Sell) is a global manufacturer of off-highway steel wheels and tires in the agricultural, earthmoving/construction and consumer markets. 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.

Recent Earnings Data

In TWI’s most recent earnings report, they significantly missed the Zacks consensus earnings estimate ($0.11 estimate vs. -$0.09 actual), but did beat the Zacks consensus revenue estimate.  The company posted a +10% increase in net sales, but the net loss applicable to shareholders increased from -$5.2 million in Q2 16 to a net loss of -$10.3 million in Q2 17.  

Issues Facing the Company

Declining gross margins due to increasing raw material costs (costs increased in all geographical areas) negatively impacted EPS in the second quarter.  To combat the increase in raw material costs, management increased prices for their aftermarket original equipment manufacturer (OEM) contracts, which should contain some of the raw material costs.  Also, the slowdown and lack of an overall recovery in agriculture is acting as a further headwind.  Lastly, the second half of the year typically has a seasonal slowdown which will put further pressure on both the top and bottom lines.  

Management’s Take

According to Paul Reitz, President and CEO, “The current quarter saw sequential gross margin improvement, up from 11.1 percent in the first quarter to 12.0 percent in the second.  This improvement was in spite of significant raw material pricing headwinds that negatively impacted gross profit by approximately $11 million during the second quarter.  Although we believe that raw material pricing has now stabilized, our OEM contracts in North America did not allow us to fully pass through these higher costs during the quarter. Because of these headwinds, we did not reach the gross margin level we experienced this quarter last year; however, with the increased pricing that has now taken place with the OEMs and the raw material price stabilization, we do not anticipate further negative impacts from raw material prices in the second half of this year.”

Price and Earnings Consensus Graph

As you can see in the graph below, the elevated cost for raw material, the implementation of their new enterprise resource system (ERP), and the negative seasonality of the second half of the year, has caused the stock price and future earnings estimates to decline as of late.

Titan International, Inc. Price and Consensus

Titan International, Inc. Price and Consensus | Titan International, Inc. Quote

Declining Earnings Estimates

Given the headwinds facing the company over the next two quarters earnings estimates for Q3 17, Q4 17, FY 17, and FY 18 have all seen negative revisions over the past 30 days; Q3 17 fell from $0.01 to -$0.12, Q4 17 declined from $0.06 to -$0.08, FY 17 was cut from -$0.30 to -$0.55, and FY 18 was reduced from $0.33 to $0.15.

Bottom Line

The next two quarters will be a bit difficult for the company, but once their ERP system, and increased prices take effect the company can see a positive turnaround by the second quarter 2018.  In the meantime, if you are inclined to invest in the Manufacturing/Farm Equipment segment you would be best served by looking into Deere & Co (DE - Free Report) and or AGCO Corp (AGCO - Free Report) both of whom currently carry a Zacks Rank #3 (Hold) rating.

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