Clash of the Titans: Titan Machinery $TITN vs Titan International $TWI

Release the Kraken!

I have spent a lot of time trying to predict how the various macroeconomic trends will unfold over the next few calendar years. It always reminds me of the Peter Lynch quote, “If you spend more than 13 minutes per year on economics, you’ve wasted 10 minutes.” I can’t dwell on that quote too long, or I have to transition to Albert Camus, “One must imagine Sisyphus happy.”

Alternatively, you could just buy good businesses cheap, and be relatively confident that every dog will have his day once again. But, if I were to try and put a spin on this strategy, the best thing would be to find cyclical businesses, but with independent cyclicality. That way, there would be decent odds of having something at the peak at the same time as having something else at the trough, and then to do the impossible, accretively rotate funds. Otherwise, if all the stocks have correlated cycles, they are all up or down together. This leads to the following bit of self-reflection:

One of the more independent cycles is agriculture. Ever since we expanded the division of labor far enough, business cycles and credit cycles have become independent to agricultural cycles. As far as I understand agriculture, every few years there is some sort of weather event that affects the harvest of a staple crop. The destroyed supply increases the average price, and farmers are rolling in cash. If there is no weather event, farmers produce so much that they linger around breakeven.

It has been two years since a staple crop suffered a weather event. Sure, we have had a price shock in coffee and in chocolate, but unless something happens to corn, wheat, rice, or potatoes, the American farmer is having a hard time. But nature is fickle, and the next weather event to cause a crop failure in a staple is always just around the corner. You can never know which year it will happen, but with certainty, bad weather will come again.

This means that at the moment, agriculture stocks are cheap, but at some point will have an incredible year again, but we don’t know when. The real attraction here is if agriculture over earns in a year when those profits can be rotated into something else that is temporarily cheap. The big flaw in agricultural investing is the land bugs. People who say things like, “God isn’t making any more of it,” bid agricultural prices up to the sky. This makes bargains hard to find in US farmland, but not in the equipment manufacturers and dealerships.

Titan Machinery (TITN)

I have written previously about Titan Machinery, a midwestern, founder-led, agricultural equipment dealership with rentals, parts, and service. I have dug into more than a few of these dealership businesses, and am slowly starting to expand my competency into this business model. The parts and service revenues are keeping the business slightly profitable during this down part of the cycle, and the next time farmers are flush with cash, equipment sales will pick up, and the stock price has the capacity to triple if it returns to past peak market capitalization. If that happens in two years, it would be a 73% rate of return. If it happens in three years, a 44% return, in four years, a 31% rate of return, and in five years, a 24% rate of return. A lot is depending on when nature decides to ruin a major staple crop next.

But in the meanwhile, TITN did execute an opportunistic growth acquisition, the salt-of-the-earth Australian equipment dealership founder got on well with the salt-of-the-earth American equipment dealership founder, and decided that he was happy to sell his Australian company to TITN. This revenue growth is masking the fact that TITN should be close to the trough of their earnings. The market is not ignoring the fact that they had an accounting loss two quarters ago, and that this thin margin business is suffering under the increased operating expenses of their recent acquisition.

Titan International (TWI)

I was not initially planning on putting this writeup behind a paywall, but it isn’t every earnings call that is as optimistic as the most recent TWI earnings call. The CEO was practically giddy.