January 12, 2012
Beating the Market Using Momentum as a Filter.
On Jul 30, 2009 we published a column on Seeking Alpha titled, "Discipline:
The Key to Successful Investing" which highlighted methods we apply in order
to to screen for rewarding investment opportunities. One of these tools involves
tracking daily new high data in attempt to find cheap companies that offer both
timely value and growth propositions. This momentum approach was the core of our
very successful investment strategy in the early years of our company (for about
10 years).
Many investors are hesitant to embrace this approach, equating value with price
as opposed to traditional valuation measures like P/E and EBITDA ratios. Ultimately,
we are searching for value at any price and it's a plus if a potential candidate
is timely. Tracking new highs is a way to let the market come to you and tell you
what it thinks is hot even when dealing with uncertain markets. It is then our job
to determine what few stocks on this screen will offer superior investment returns.
This approach is what led us to buy Cpi Aerostructures (CVU) and Orchids Paper (TIS)
in the depth of the 2008 global economic crisis. See
TIS GeoBargain Notes and our
assessment of CVU based on a past conference call in January 2010. We
also wrote about both of these companies on SA in the past (CVU,
TIS) Both companies have given healthy returns to investors, ultimately
at least doubling in value. So as always, we urge investors to have an open mind
so they can ask themselves what the new daily high lists are placing on their plates
right now.
The market is clearly telling us that it is excited about stocks that are befitting
from the mini energy exploration boom taking place in the U.S. Several articles
have begun to highlight this explosive undercurrent. See SA article, "Shale
Oil is the New Energy Boom in the US" Wall Street Journal Online article,
"Oil-Drilling
Boom Under Way".
Just look at the following list of stocks and their respective charts that are involved
in offering services ranging anywhere from fracking to equipment providers that
have been popping up on new high screens.
Recent 12 month highs:
Flotek Industries (FTK) - Fracking (extraction) Services
FTK 1 year chart
Mitcham Industries (MIND) - Equipment
MIND 1 year chart
Provident Energy (PVX) - Infrasctruture and Marketing
PVX 1 yr chart
Newpark Resources (NR) - Fluids management, waste disposal, and well site
preparation
NR 1 yr chart
Recent 3 month high
Manitex Intl (MNTX) - Equipment
MNTX 1 yr chart
Analyst estimates for FTK, MIND, NR and MNTX all indicate that superior EPS growth
is in the cards for the next three quarters (including the December 2011 quarter).
There are no estimates for PVX but it has logged impressive EPS growth for the last several
quarters.
We are most intrigued by MNTX and MIND which we believe offer compelling growth
+ value plays. Both sell at
P/Es of 10 or less times 2012 EPS estimates
and are projected to grow 2012 EPS at least 61% and 35%, respectively.
We are still delving into the fundamentals of the MNTX story, but the stock appears
ready for a technical break out and may soon flirt with its 52 week high of $6.76
if it can convincingly break through $5.00. We recently gave MNTX our top GeoBargain designation.
Now on to Titan International (TWI), One of our current GeoBargains
In light of the above, what follows is our assessment of the TWI story; a company
not yet on any new high screens, fully entrenched in the earth moving market that
should be an immediate and direct beneficiary of the energy exploration boom.
We predict it will reach its 52 week high of $31.42 during 2012.
On 12/22/2011 we coded TWI as a GeoBargin @ $18.99
Titan International, Inc., a holding company, owns subsidiaries that supply wheels,
tires and assemblies for off-highway equipment used in agricultural,
earthmoving/construction and consumer (including all terrain vehicles)
applications.
Data Ended 1/10/2012: All calculations are based on non-gaap numbers(non-gaap
numbers are adjusted for non operating/cash gains and or charges.)
- Price = $21.28
- Trailing EPS = $1.30
- EPS Estimates = $2.25
- P/E based on Fully-Taxed Trailing EPS = 16.3
- P/E based on EPS estimate = 9.45
Criteria Check List
TWI Meets 5 out of 10 of our most important GeoBargain® Requirements
Additional factors to consider in analysis
- Effective Internal Controls: No
- Need to raise equity capital: No
Reasons for Optimism
- We believe the 2012 company revenue guidance of
$1.7 to $1.9 billion is conservative and does not include possible acquisitions.
Comments from the December 9, 2011 press release:
[...]“We exit the year with much optimism for what lies ahead for ag, construction
and earthmoving business,”[...]
[...]"There are catalysts that may drive these ranges higher. If the necessary equipment
is installed at the respective facilities by September 2012, sales could exceed
$2 billion. The 2012 forecast does not include
any anticipated acquisitions.[...]
We also believe guidance does not take into account any revenue from its recent
acquisition of Goodyear Tire & Rubber's(NYSE:GT) Latin American farm tire business
that was consummated on April 1, 2011
- Favorable industry outlook for earth moving/mining segment. Through its earth moving
equipment division, the company has positioned itself to be a direct beneficiary
of the energy exploration boom currently occurring in the U.S.
Ryan Dezember and Matt Day of The Wall Street Journal state "Oil-drilling activity in the U.S. has accelerated
to a pace not seen in a generation as energy companies, oilfield contractors and
landowners rush to exploit newly profitable sources of crude."
From a Seeking Alpha article by David Fessler "A September report from the U.S.
National Petroleum Council (NPC) said that U.S. shale oil reserves are “proving
to be much larger than previously thought.” The NPC indicated that shale oil
production could rise to as much as three million barrels per day “depending
on access to new plays and continued technology development.”
- Business plan is not only targeted toward achieving organic growth, but will continue
to lean on strategic acquisitions. We are particularly excited about the recent
acquisition of the Goodyear Tire & Rubber (NYSE:GT) Latin American farm tire
business. Goodyear's market share of the relevant Latin American market declined
from approximately about 40% to 25%. Being involved
in this market was not in Goodyear's wheelhouse. We believe TWI's market expertise
in the agricultural industry will allow it to recapture lost market share and put
idle manufacturing capacity to work. The company is currently awaiting license approval
to operate in Brazil.
- Competitive advantage/barriers to entry. Plenty of excess capacity to meet demand
which means its CAPEX needs will not pose liquidity constraints, especially
compared to weaker competitors or new entrants into its market. TWI is the only
U.S. manufacture to offer both tires and wheels to the earth moving construction
industry.
- Bullish conference call. From the 12/13/2011 conference call CEO Maurice Taylor
states revenue guidance of $1.7 to $1.9 billion for 2012 is conservative and says
"Back orders are 2 to 2.5 times larger then they have ever been" and states "we are having a record year and next year will be even
bigger".
GeoTeam overall subjective/confidence comfort level: Pertains to the ability of
a company to achieve solid and consistent EPS growth over the next several quarters
(from 1 to 10): 7
Potential Valuation Scenarios if the company can achieve its EPS growth goals
Short-Term Potential value based on fully taxed adjusted trailing EPS
P/E 20 * $1.30 = $26.00
P/E 25 * $1.30 = $32.50
Short-term Potential value based on 2012 EPS estimate
P/E 15 * $2.25 = $33.75
Valuation scenarios are not intended to be investment advice, but are scenarios
based on some commonly used investment guidelines. They are provided to aid investors
in making their own investment decisions.
Caveats:
- Missed third quarter 2011 EPS estimate (yet still logged in nice EPS growth).
- In theory, a decrease in energy related commodity prices could lead to less exploration
activities
- High debt to equity ratio
- Integration risk with acquisitions.
- License to operate in Latin America has yet to be granted.
- Operating Cash flow for the 3rd Qtr 2011 was $18.9 million, however we would like
to see the company report several quarters of positive operating cash flow, as nine
month number is still negative.
- High short interest
- Internal controls are not effective
Disclosure: Long TWI
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