Here we go again?
In 2007, Titan International (TWI) was one of the hottest stocks in the commodity sector, climbing 55%. The company couldn’t make tires fast enough to meet demand in the mining sector.
The stock plunged in 2008—falling 67%—before recovering (and how—up 141%) in 2010. The shares are up 41% in 2011 to date, but down 11.4% in the last month.
Should you buy on the dip?
It depends on how long you think the demand will last for the tires that go on the big trucks that haul coal and iron ore.
Prices for the huge tires that go on Caterpillar trucks, for example, have climbed to $100,000 on the spot market. In the last boom, Barrick Gold reported spending $60,000 for a tire on its largest trucks.
In the first quarter of 2011, Titan International set new records for revenue of $280 million, up 43% from the first quarter of 2010, and for operating income (excluding one-time charges for exchanging convertible debt for stock) of $27 million, up 166% from the first quarter of 2010.
That kind of growth makes the stock’s trailing 12-month price to earnings ratio of 221 look reasonable. At a projected growth rate of 185%, the forward price-to-earnings ratio on projected earnings is just 16.9.
No doubt that the mining business tends to boom or bust—but actually, 75% of Titan International’s revenue in the first quarter came from its farm-tire business. That business is cyclical, too, but right now it looks like the farm sector is in for a relatively long period of high commodity prices and strong farm income.
Sales growth in just the farm section came to 39% year-to-year in the first quarter of 2011. The company just spent $99 million to acquire Goodyear’s Latin American farm tire business. That deal closed in April 2011.
However, sales of tires for mining and construction equipment grew faster, at 59% in the first quarter.
There’s no doubt that the odds on Titan International shares moving from $24.27 on June 30 back above the 50-day moving average at $25.75, and then to something like the 52-week high at $31.42, depends on demand from that sector lasting for a while at current growth rates.
In its first-quarter 10Q filed with the Securities & Exchange Commission, the company said it will. Sales, the company expects, will continue for the rest of 2011 at first quarter levels. That would put sales growth at 22% year-to-year in the second quarter, and produce a 59% growth in operating income.
A report from PricewaterhouseCoopers on the mining industry supports Titan International’s optimism. According to the report, the world’s Top 40 mining companies plan to spend $120 billion on building or expanding operations this year.
I’m adding Titan International to my Jubak’s Picks portfolio today, July 1, with a target price of $31 a share by December 2011.
Full disclosure: I don’t own shares of any of the companies mentioned in this column in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this column. The fund did own shares of Titan International as of the end of March. For a full list of the stocks in the fund as of the end of March, see the fund’s portfolio here.
