Industrials are an odd sector, never top performer, but never on the bottom either. The average price to earnings ratios never really feel that cheap. There is a competence hurdle to overcome, but not nearly as difficult as biotech or tech. And before I could complete an update to my model portfolio, I needed to dig through the industrials and prioritize them.
Babcock and Wilcox (BW) has had quite a rollercoaster since my writeup on July11th, 2024. They beat one quarter, the stock price doubled, and they missed the next, and the stock price was cut in half. In the meanwhile, BW has settled the last remaining legacy loss-generating maintenance contract, and are focused on only taking new business with decent margins. It was accepting business with poor margins that got the company into this mess in the first place. This $116 million market capitalization company is guiding toward $90 million of EBITDA in the next 12 months. But, their $400 million of long term debt eats up about $50 million of that in interest expense, so BW can only organically pay down a fraction of their debt. But they are willing to do asset sales, and they have a lot of valuable business segments to sell. One big difference between now and when I first wrote about this stock is that baseload electricity is suddenly in vogue, and BW has just landed a $246 million contract over 30 months to do a coal to gas switching project in Indiana. A return to a 1.64x price to sales ratio over the course of three years with organic growth of their thermal segment would make BW a 15 bagger. Even if that took five years instead of three, there’s no need to calculate an internal rate of return. When I first wrote about BW, their EBITDA was less than their interest expense, and the stock price was double where it is today. I’m still holding, and I would consider adding more, but there are more urgent things to buy.
Weekly Paywalled Ten Bagger or Bust Stock
Thank you again to Benjamin Demase who had me on his YouTube channel as a guest discussing Profrac Holdings (ACDC) and Douglas Elliman (DOUG.) Also thank you to my chad founding subscribers. I still have a very limited reach, so any restacks or retweets go a very long way to helping me build this Substack, and I am grateful for all of them.
Titan Machinery (TITN) recently had a sell-side analyst price target upgrade from $14 to $25, and the stock gapped up from $16 to $18. Management is still guiding toward poor results in the near future. Not much is happening fundamentally, farmers need higher crop prices before they buy new tractors. TITN hasn’t traded above a price to sales ratio of 0.47x in the last fifteen years, so even buying it at 0.15x makes it a triple at best. But it’s one of the safer triples you can find, and agriculture is a unique and independent cycle. I sold my TITN to buy ALTG, CTOS, and TWI, but TITN is an excellent choice for investors who prefer quality and don’t feel the need to be too greedy. I disagree with the sell-side analyst for the near term, and I wouldn’t be surprised to see TITN’s price fall from $18.
Why Titan Machinery $TITN is a founder-led midwestern value cyclical.
I am always on the lookout for uncorrelated cycles in the vain hope that someday I will be able to take profits from one position and plow them into another in a world where they are not all up or down at the same time. That is hard to find when I restrict myself to industries that I can understand. Agriculture has always interested me, but there are …
Alta Equipment Group (ALTG) has grown parts and service recurring revenue, paid down debt, announced a share buyback and their stock price is below where it was when I wrote about the company in July. Management believes that the recent election will drive a significant increase in business next quarter, and that sales last quarter were affected by uncertainty surrounding the election. ALTG is much more of a growth story than many of the other companies on this list, and although this business model typically doesn’t fetch high multiples, it can triple on multiple rerating alone. Revenues doubled in the three years from 2020 to 2023, and the company is still looking for more acquisition targets. I will be holding on to my shares for a long time, ALTG has a path to a 6x in three years with a combination of growth and multiple rerating.
Paywalled small cap of the week, a potential 4x-5x with exposure to robotics.
It has been quite a week as small cap stocks rally. People are starting to call it the small cap summer, and some analysts are projecting the Russell 2000 could go up another 40% before the end of 2024. I am cautiously optimistic, but I have endured so much pain in holding these stocks for the last year, that maybe we are due for a little mean reversion. This recent rally has made a lot of my past recommendations look a little more genius than they deserve to, none of the companies have had any earnings announcements or material changes to their businesses, but oh how price drives narrative.
Custom Truck One Source (CTOS), unlike many of the names on this list, is off of their lows. Management claims that they now see a turnaround in their business, the cycle has turned, and the good times are back. This matches what has been said by management at TITN and ALTG, infrastructure spend by local governments is expected to be strong, and CTOS as the pure construction equipment dealer is the best positioned to take advantage of this. ALTG is much more exposed to manufacturing, but does overlap with construction as well. If I had been paying attention, I would have recommended CTOS due to the two hurricanes this year, as they have exposure to telecom and electrical infrastructure construction as well. Management is guiding for next quarter to be very strong, although I never know to what extent this is priced in already. I have been tricked by “buy the rumor, sell the news” before, but I do find that sometimes small caps are so overlooked that it really is that simple. CTOS currently trades at a price to sales ratio of 0.67x, and at its peak traded at 1.64x. Since ALTG, TITN, and CTOS all have identical businesses, this could imply that ALTG could someday trade at a much higher multiple once their parts and service stable recurring revenue is a larger percentage of their revenue mix. A rerating would be more difficult for TITN due to agriculture’s cyclicality. I own some CTOS, and am considering adding more before the next earnings call. But if CTOS has room to triple, then ALTG has room to 9x if both can eventually fetch the same multiples.
The profits are parked in the yard: Custom Truck One Source $CTOS
Before I dive into todays’ topic, I wanted to give a brief update on what I am buying this week with the limited funds that I raise from selling weekly puts. Given the sudden drop in share price, as well as the high likelihood of a quick reversal after the next earnings call, this week half of my proceeds were invested into New Fortress Energy (NFE), a…
FTC Solar (FTCI), the CEO is out there moving and shaking. FTCI has been landing new contracts, hiring sales staff aggressively. I still believe this is one of the better contrarian theses out there, blue states and hydrocarbon poor countries will still build out solar power, the prices are in the trash can, and any inflection would be violent. Just as with many businesses in this space, we are waiting to see if these backlogged projects choose to begin construction in early 2025 after the election, interest rate cuts, and promised deregulation. There are so many unknowns with the new CEO Yann Brandt landing new contracts aggressively, that it is a fool’s errand to put a price target on FTCI.
Investing in Clean Energy Makes Me Feel Dirty: FTC Solar $FTCI
Welcome back to the “Ten Bagger of Burst” series where the stock under scrutiny has the capability of providing a 10x return in a relatively short period of time, but also has the potential to go to zero.
Titan International (TWI), recently signed a new contract to be a global supplier to John Deere. Management claimed that their recent acquisition expanded their capabilities to a broad enough spectrum that they could compete for significant opportunities, but it isn’t often that it materializes this quickly. The stock price has barely responded. The price to sales ratio is still 0.30x, and at its peak, TWI traded at 1.14. With a bit of growth from new contracts, TWI could be a five bagger in a few years. TWI has become one of my new favorite industrials.
Clash of the Titans: Titan Machinery $TITN vs Titan International $TWI
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.”
Conclusion:
Unlike with the Consumer Discretionary round up, there aren’t any bad choices in the group. I prefer ALTG and TWI as I believe they have the best risk reward relationship. BW has the most torque of all, but the wait might be a few years longer than I have patience for. CTOS has the most imminent catalyst and is likely to have an excellent next quarter. And TITN is probably the least risky triple that one could ask for. Again, not a bad choice in the bunch. I have positions in all except for TITN.
TITN and ALTG have the management teams that I most admire. If you are a Warren Buffett devotee and want to focus exclusively on management’s character, those would be the choices. FTCI would be at the bottom of the list as far as admiration, but I am not against occasionally owning a piece of a company run by a hustler, as long as I know what his hustle is and he is good at it. I predict Yann Brandt will polish FTCI up for a sale within two years, and he is taking his profits through equity much more than through salary. So the patsy at the poker table probably isn't me.
CTOS is the most exposed to the data center buildout with their power line construction equipment. ALTG is the most exposed to reshoring with their forklift business. But BW might be voted the most likely to have a pleasant but unexpected surprise. The sudden demand for baseload power has caused a lot of buzz, and BW has an awful lot of patents and capabilities in the energy space from their 160 year old business. I would say the BW is the most like a lottery ticket, in that it is capable of a large surprise payout, it is at the cheapest metrics, it has the potential to easily land multi hundred million dollar contracts, and it could eventually trade at the highest multiple of the group.
Take your pick, there is something for everyone. I will be on the lookout for other interesting industrial companies. I did not cover FET and MATR.TO here as their writeups were both so recent, not much can change in a few weeks.
Great write up.
$pags moving today, I’m finally green. Have you ever looked at $omab. It was profiled by Chit Chat Stocks few days back.