Over the past six months, Titan International’s shares (currently trading at $7.96) have posted a disappointing 10.6% loss, well below the S&P 500’s 16.2% gain. This was partly due to its softer quarterly results and might have investors contemplating their next move.
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Why Do We Think Titan International Will Underperform?
Even though the stock has become cheaper, we're cautious about Titan International. Here are three reasons we avoid TWI and a stock we'd rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Titan International grew its sales at a mediocre 6.9% compounded annual growth rate. This was below our standard for the industrials sector.
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Over the last few years, Titan International’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
3. Short Cash Runway Exposes Shareholders to Potential Dilution
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Titan International burned through $12.18 million of cash over the last year, and its $715.5 million of debt exceeds the $184.7 million of cash on its balance sheet. This is a deal breaker for us because indebted loss-making companies spell trouble.
Unless the Titan International’s fundamentals change quickly, it might find itself in a position where it must raise capital from investors to continue operating. Whether that would be favorable is unclear because dilution is a headwind for shareholder returns.
We remain cautious of Titan International until it generates consistent free cash flow or any of its announced financing plans materialize on its balance sheet.
Final Judgment
Titan International falls short of our quality standards. After the recent drawdown, the stock trades at 22.4× forward P/E (or $7.96 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are better investments elsewhere. Let us point you toward a safe-and-steady industrials business benefiting from an upgrade cycle.
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