thx on TITN tuna, the double whammy today - IBD New America piece:
Investor's Business Daily
Farm Equipment Distributor Grows By Acquiring Mom-And-Pop Shops
Tuesday February 19, 5:59 pm ET
Amy Reeves
In classical myth, Ceres was a harvest goddess who was eaten by her father, who came from the family of Titans. So it was perhaps fitting that Minnesota farm-implement dealer Ceres Equipment was devoured this month by Titan Machinery (NasdaqGM:TITN - News).
Such buyouts are a regular habit for Titan. Over its 28 years of existence, the North Dakota company has bought its way into 39 dealerships around the upper Midwest. They all specialize in heavy farming and construction equipment from Dutch firm CNH Global (NYSE:CNH - News), with brands including Case1H and New Holland Agriculture.
According to Chief Executive Dave Meyer, these stores are a lot happier to be eaten than the goddess Ceres was.
"I've got a full pipeline of future acquisitions of dealerships who have called me," Meyer said. "If you look at the demographics, you've got aging dealers in a fragmented industry. You've got a lack of capital and a lack of succession (options)."
Tough Competition
In its region, Titan faces other big brand-name dealers, such as Deere (NYSE:DE - News) and Caterpillar (NYSE:CAT - News). But as a consolidator of CNH dealers in the upper Midwest, it has the field pretty much to itself.
"Nobody of any size or scale that we are aware of is trying to consolidate their industry," said analyst Robert Evans of Craig-Hallum, manager of Titan's Dec. 6 IPO. "There's always some level of competition from smaller mom-and-pops trying to expand their presence. But they tend to not have the access to capital to be really competitive in a bid against Titan."
So there's not much to slow down the company's growth. In the fiscal third quarter, sales jumped 67% from last year to $132 million, while profit soared 267% to 22 cents a share. Analysts estimate that in fiscal 2008, which ended Jan. 31, sales rose 45% to $425 million while profit gained more than 50%.
Analysts say this growth doesn't come just from chowing down market share. Titan also is benefiting from strength in agriculture, one of the few sectors still doing well in this miserable market.
Robert W. Baird, another IPO manager, pointed out in its initiation report that corn prices have soared 129% in the past two years, driven partly by ethanol demand. Since corn production has crowded out soybean fields, soybean prices have also more than doubled.
Analyst Evans also points to demand for imports from China and India. That demand also has helped drive up the price of wheat.
"If you look at futures prices for two or three years out, there's still a strong upward bias," he said.
Meyer says the nature of the business is changing in ways that favor Titan's economy of scale.
"If you look at the price of equipment, we've got combines going for $300,000," he said. "That's a big change from when dealers first got into the business, when combines were $40,000 to $50,000. That's a big change in the amount of capital it takes and what it takes for parts, services, HR issues and people on the technical side."
Indeed, although parts and service draw only 23% of Titan's revenue, they provide more than half of its gross profit. This matters a great deal because, as in all retail, margins are thin.
But Titan's numbers have improved on that front. In the latest quarter, after-tax margin was 2.1%, compared with 1% a year earlier.
That probably accounts for the friendly reception Wall Street has given Titan. Despite the bear market, the small float and the less-than-big-name underwriters, the stock has nearly doubled its 8.50 initial price. Volume averages nearly 300,000 a day -- not bad for a small cap.
Baird's analysts note that there simply isn't another stock quite like Titan on the market. The closest comparable is Rocky Mountain Dealerships, a Canadian firm that trades on the Toronto exchange. This might explain investors' appetite for a small, growing company in a sector without emerging stocks.
Scalable Model
It's good that investors like Titan's current model, because, according to Meyer, they're going to get more of the same.
"This model's a very scalable model," he said. "Our plan is to have methodical growth through same-store organic growth, and through acquisitions."
Evans doesn't see any need for a big change in either geographic footprint or brand offerings. He foresees the company reaching $1 billion in annual sales in the near future. With more than 700 CNH dealers around the country, it has plenty of room to keep buying.
Analysts polled by Thomson Financial see earnings per share sliding 14% in fiscal 2009, but that's because the IPO boosted the number of shares, says Evans. Without the per-share calculation, net income is expected to rise about 40% to $10million.
http://biz.yahoo.com/ibd/080219/newamer.html?.v=1
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