Titan Machinery - A Fair Value Report

My Disclaimer
I am a value investor. I am not a licensed or registered investment professional. I currently have NO investment position in the company mentioned in this report. Financial statement data was obtained from the company’s most recent SEC 10-K filing.

Risk
Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

Intent
The intent of this report is to provide the reader with a brief overview of my various company valuations so they can independently determine their current level of investment interest.

What They Do
Titan Machinery owns and operates a network of full service agricultural and construction equipment stores and is a retail dealer of both Case IH and New Holland agriculture and construction equipment. Industry peers include Catepillar, Inc., Deere and Company, and Komatsu, Ltd.

Recent Business Acquisitions and Divestitures
In January 2019, the company, through its German subsidiary, acquired certain assets of ESB Agrartechnik GmbH. ESB is a full-service agriculture equipment dealership in Eastern Germany. The company’s acquisition of ESB further expands its presence in the German market. The total consideration transferred for the acquired business was $3.0 million paid in cash.

In October 2019, the company acquired certain assets of Uglem-Ness Co. The acquired business consists of one Case IH agriculture equipment store in Northwood, North Dakota. The service area is contiguous to the company’s existing locations in Grand Forks and Casselton, North Dakota and Ada, Minnesota. The total consideration transferred for the acquired business was $10.9 million paid in cash.

In connection with the acquisition, the company acquired from CNH Industrial and certain other manufacturers equipment and parts inventory previously owned by Uglem-Ness Co. Upon acquiring such inventories, the company has been offered floorplan financing by the respective manufacturers. In total, the company acquired inventory and recognized a corresponding financing liability of $7.4 million. The recognition of these inventories and the associated financing liabilities are not included as part of the accounting for the business combination..

Subsequent Events
From the company’s most recent SEC annual filing:

In January 2020, the company entered into a definitive purchase agreement to acquire HorizonWest Inc., which owns a three store CaseIH agriculture dealership complex in Scottsbluff and Sidney, Nebraska and Torrington, Wyoming. In its most recent fiscal year, HorizonWest generated revenue of approximately $26 million. The company expects to close the acquisition in May 2020.

Effective March 23, 2020, the company announced it would temporarily prevent public access to its stores in response to the increased impact from novel coronavirus (COVID-19). While customers temporarily do not have access to our facilities, we are fully staffed; and we are using technology, mobile service fleets and alternative delivery solutions to provide equipment, parts, service and rental to our customers. While this is expected to be temporary, the current circumstances are dynamic. The impacts of COVID-19 on our business operations, financial results, and on customer demand cannot be reasonably estimated at this time.

In April 2020, the company entered into a Third Amended and Restated Credit Agreement, arranged by Bank of America, with a syndicate of lenders consisting of Wells Fargo, Regions, BBVA, Sterling National Bank and AgCountry Farm Credit. The new credit agreement provides for an aggregate $250 million financing commitment by the lenders, consisting of an aggregate floorplan financing commitment of $185 million and an aggregate working capital commitment of $65 million. Loans under the new credit facility will carry an initial effective interest rate equal to LIBOR plus an applicable margin of 1.5% per annum, based on the company’s liquidity position. The terms of the new agreement are similar to those in the previous credit facility, but favorably impacted by the increased advanced rates adding to the company’s excess availability. In conjunction with entering into the new credit agreement, the company repaid in full all debt outstanding under its previous Wells Fargo Credit Agreement, which was to mature in October, 2020.

Short-Term Target
My current short-term target for the stock is $12.95, with an initial trailing stop set at $9.33. Based on a recent price of $9.47, upward price movement will find resistance at $10.23, and again at $11.97, with final resistance found at $13.65. Downward price movement will find support at $8.92 and again at $8.27, with final support found at $7.83.

Volatility Value
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market. My current beta ratio for this stock is 1.74 and my current volatility value is $5.

Quality of Earnings
A company’s earnings can be impacted by sources unrelated to the company’s day to day operations. These unrelated sources may distort a company’s operating income and consequently its fair value. Investors should always explore the sources of a company’s operating income to better understand potential valuation impacts. Considering the company’s earnings, $0 per share came from sources unrelated to day to day operations and/or from income tax benefits.

Growth Target
My current growth target for the stock is $11. Growth targets are determined using a company’s year-over-year earnings growth, year-over-year PE growth, and year-over-year price growth.

Key Performance Indicator Rating
I use key performance indicators (KPIs) as a barometer to measure the effectiveness of management. Several of the metrics that I use are the tangible asset ratio, return on invested capital, free cash flow growth, earnings growth, debt growth, the dividend payout ratio, and the cash conversion cycle. Admittedly, my use of these and other metrics as a way to determine the effectiveness of management is subjective. Be that as it may, for me, they work. Based on a 0-105 scale, my KPI for this company is 44.

Five Year Growth of $10K
Had you invested $10K in this company five years ago (01/31/15), you would have received 708 shares of stock with a cost basis of $14.13 per share. Had you held the stock for five years and then closed your position (01/31/2020), you would have closed at $12.59 per share. During that holding period you would have collected $0 in regular and special dividends, and your initial $10K investment would have returned to you $8,910 a loss of 11% excluding regular and special dividends.

Cost of Common Equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium. My cost of common equity for this stock is 6.57%.

Insider Transactions
The SEC classifies insiders as “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

Over the past 12 months, the company has recorded 14 insider trades involving 97,429 shares of stock. Of those 14 insider trades, 11 were Buys involving 71,718 shares of stock, and 3 were Sells involving 25,711 shares of stock, creating an insider buy to sell ratio of 2.8 to 1.

Prior Average Valuations
My average valuation for the prior five year fiscal period was $34. The stock price during that time period averaged $15, earnings averaged $(0.06) per share, and the average PE Ratio was (240). The current PE Ratio is 12.

Enterprise and Equity Values
As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value, what I call my E2E Ratio. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt. For this company my enterprise value (market cap plus debt less cash) is $14 and my equity value (market cap plus cash less debt) is $5, making my E2E Ratio, 0.32.

Risk/Reward Ratio
I determine my risk reward ratio by subtracting the current price from my terminate target and then dividing that result by my initiate target less a price fluctuation variable of 25%. What I am looking for with this ratio is a value of 5 or greater. My risk/reward ratio for this stock is 7.

Fair Value Investing
Fair value investing, more commonly known as value investing, requires investors to consider a company’s overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics. My most recent fair value estimate for this stock as an on-going concern is $16. My worksheet target prices are derivatives of my fair value estimate.

Titan Machinery, Inc. (Nasdaq: TITN) – FYE 01/2020 – UNDER VALUED – The stock is currently trading at levels below my most recent $10 initiate target. Please See Linked PDF Worksheet

There you are, short and, hopefully, to the point.

Wax
Revised on 04/11/2020