Shareholders of Titan International would probably like to forget the past six months even happened. The stock dropped 21.8% and now trades at $6.59. This might have investors contemplating their next move.
Is there a buying opportunity in Titan International, or does it present a risk to your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Do We Think Titan International Will Underperform?
Despite the more favorable entry price, we’re sitting this one out for now. Here are three reasons we avoid TWI, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years. Regrettably, Titan International’s sales grew at a tepid 4.8% compounded annual growth rate over the last five years. This was below our standard for the industrials sector.
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
Unfortunately, Titan International’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
3. High Debt Levels Increase Risk
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’s $715.2 million of debt exceeds the $179.8 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $106 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Titan International could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Titan International can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We cheer for all companies making their customers lives easier, but in the case of Titan International, we’ll be cheering from the sidelines. After the recent drawdown, the stock trades at 8.4× forward EV-to-EBITDA (or $6.59 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. We’d suggest looking at one of our all-time favorite software stocks.
Stocks We Would Buy Instead of Titan International
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