Wednesday, December 11, 2013

Reseller Can't Compete with Manufacturers

The business model of Titan Machinery (NASDAQ: TITN) can't be compared to John Deere (NYSE: DE) , CNH Inc (NYSE: CNH) or Caterpillar (NYSE: CAT).
DE,CNH and Cat are manufacturers with their own financing arms, while TITN is nothing more than a reseller. The space is under pressure and competition is fierce which is squeezing margins, more so on a reseller who is at a major disadvantage against behemoth manufacturers.

Titan's bigger problem is that their management has signed ridiculously high lease contracts with outside entities that they personally have interest in (over $100million). Just in the past 12 months alone they increased these contracts from $50 million to over $100million.) Top execs make money with these outside entities even if titan doesn't do well.

The top two execs have each increased their annual salaries by 48% this year.

All the new construction TITN has been spending money on is bleeding the company and is only profiting the top exec's brother-in-law who owns the construction company doing the building.

Tthe high debt is another obstacle. Its hard enough to earn a profit, paying nearly $6 million annually in interest, "just" on the Convertible Note alone is a major drain on the stockholders (profits).

If you read the new Q3 10Q you'll see some last minute (desperate type) debt restructuring (extensions) they created.
check out:
Item 2.
Item 5.
Exhibit 10.1
Exhibit 10.2

On the inventory front, the tractors building up in inventory are depreciating assets (and with the new technologies, GPS, Fuel friendly machines etc ) and favorable terms being offered by manufacturers to buy new equipment, the used equipment is becoming obsolete.

Just look at the statement of cash flow and you'll see the results of a poor business model.

The Company holds derivative instruments for the purpose of minimizing exposure to fluctuations in foreign currency exchange rates to which the Company is exposed in the normal course of its operations.
Cash Flow Hedges
On October 9, 2013, the Company entered into a forward-starting interest rate swap instrument which has a notional amount of $100.0 million dollars, an effective date of September 30, 2014 and a maturity date of September 30, 2018. The objective of the instrument is to, beginning on September 30, 2014, protect the Company from changes in benchmark interest rates to which the Company is exposed through certain of its variable interest rate credit facilities. The instrument provides for a fixed interest rate of 1.901% up to the maturity date.
The instrument has been designated as a cash flow hedging instrument and accordingly changes in the effective portion of the fair value of the instrument are recorded in other comprehensive income and only reclassified into earnings in the period in which the related hedged item affects earnings or the anticipated underlying hedged transactions are no longer probable of occurring. Any hedge ineffectiveness is recognized in earnings immediately.
Net Investment Hedges
To protect the value of the Company’s investments in its foreign operations against adverse changes in foreign currency exchange rates, the Company may, from time to time, hedge a portion of its net investment in one or more of its foreign subsidiaries. Gains and losses on derivative instruments that are designated and effective as a net investment hedge are

included in other comprehensive income and only reclassified into earnings in the period during which the hedged net investment is sold or liquidated. Any hedge ineffectiveness is recognized in earnings immediately.
The notional amount of outstanding foreign currency forward contracts designated as net investment hedges was approximately $23.4 million as of October 31, 2013. There were no foreign currency forward contracts designated as net investment hedges outstanding as of January 31, 2013.

In November 2013, the Company modified its credit facility with Wells Fargo to increase its working capital line of credit from $75.0 million to $112.5 million, decrease its floorplan line of credit from $375.0 million to $350.0 million, extend the expiration date of the agreement from March 30, 2016 to August 31, 2018, and adjust certain financial covenants. Other terms of the agreement did not materially change.
The Company plans to close two Construction stores prior to January 31, 2014. The store in Big Sky, Montana and one of the stores in Billings, Montana will be merged with the Company’s nearby Construction stores. The Company expects the primary cost of closing these locations to be estimated lease termination costs, and will record a liability for the net present value of any remaining lease obligations, net of estimated sublease income, at the date we cease using the property, in accordance with Accounting Standards Codification 420, Exit or Disposal Cost Obligations . We expect the accrual of these costs to be approximately $0.5 million.

Page 30
We do not distinguish relocated or newly-expanded stores in this same-store analysis. Closed stores are excluded from the same-store analysis. Stores that do not meet the criteria for same-store classification are described as acquisition stores throughout the Results of Operations section in this Quarterly Report on Form 10-Q.

The increase in revenue for the third quarter of fiscal 2014, as compared to the same period last year, was due to acquisitions contributing $32.2 million, offset by a decrease in same-store sales of $26.4 million. This decrease in same-store sales reflected a 4.5% decrease over the prior year period and was primarily driven by lower equipment revenue.

Based upon balances and interest rates as of October 31, 2013, holding other variables constant, a one percentage point increase in interest rates for the next 12-month period would decrease pre-tax earnings and cash flow by approximately $5.5 million

On September 6, 2013, the Company issued 22,321 shares of its common stock in exchange for the purchase of 20% ownership interest in Titan Machinery Romania SRL and Titan Machinery Austria GmbH. We believe that this transaction was exempt from the registration requirements of the Securities Act by virtue of Section 4(2) thereof and Regulation S promulgated thereunder, based on the limited number of offerees in such offering and certain representations and warranties made by such offeree in the transaction.
ITEM 5.                OTHER INFORMATION
Effective October 31, 2013, the Company entered into an amended and restated wholesale financing plan with Agricredit Acceptance LLC, which increased the size of the floorplan credit facility by $75.0 million, from $150.0 million to $225.0 million. Other terms of the agreement did not materially change.
Effective November 14, 2013, the Company entered into a Second Amendment to its amended and restated credit agreement, dated March 30, 2012, by and among the Company, Wells Fargo Bank, National Association, and the other lenders party thereto. The amendment increased the aggregate working capital commitments by $37.5 million to $112.5 million, extended the maturity dates of the working capital line of credit and floorplan line of credit from March 30, 2016 to August 31, 2018, and changed certain financial covenants.

Exhibit 10.1
Agricredit Acceptance LLC
8001 Birchwood Court | PO Box 2000 | Johnston, IA 50131-0020
PH: 800 873 2474 FAX: 515-334-5862
Debtor Name:
Titan Machinery, Inc.
(the “Debtor”)
Date of this Wholesale Financing Plan:
October 31, 2013
Address of Principal Place of Business and Chief Executive Office:
644 East Beaton Drive
West Fargo, ND 58078-2648
Additional approved locations where the Collateral will be kept and stored:
See Exhibit A to the Amended and Restated Inventory Security Agreement

Tuesday, December 10, 2013

Olstein Says "Cash is King"

In the New York Times this weekend, Jeff Sommers published an article "Beating the Market, A Reachable Goal" , where he interviews money manager Bob Olstein.

"Mr. Olstein looks for stocks that are under appreciated, and that are strong in a metric he has always favored: “free cash flow yield.” (It is cash, after subtracting capital expenditures and working capital, divided by market capitalization.) “Cash is king,” he says. “That’s what you’re paying for when you buy a stock — the ability to generate cash. But few people even bother with it these days.” He says he prefers “boring companies” — if their free cash flow excites him"

Equities Research archives of Bob Olstein articles 


Friday, December 6, 2013

Stockdiagnostics Examines Titan's Q3 Financials

Stockdiagnostics' chief market strategist, Michael Markowski, published the following report Knobias this morning @ 9:56am.

Probability of 2014 Bankruptcy for Titan Increases After it Files Quarterly Report

By Michael Markowski

The probability of Titan Machinery (NASDAQ:TITN:$15.00) having to file for bankruptcy by the end of or sooner than the end of 2014 has increased significantly based on its 3rd quarter 10/31/13 financials that it filed yesterday.  In a report “Tractor Pull for Titan Machinery May be Over by Tomorrow” which was published on December 4, 2013, I had predicted that Titan would file for bankruptcy by the end of 2014.  

Titan’s Income Statement, Balance Sheet and Cash Flow Statement data deteriorated over the 90 day period.  Titan’s revenue for its 3rd quarter increased by less than 1% from $582.1 million in the year ago quarter to $588.0 million.  It also reported that its inventory increased by 10% to $1.2 billion from its quarter ended July 31, 2013.  Finally, Titan operating cash flow for the quarter was a negative $59.8 million.  Titan has generated negative quarterly operating cash flow in nine of its last 10 quarters.

Titan is following a similar script that I have seen played out by numerous companies that has diagnosed as having “The EPS Syndrome”.  Notable companies who were previously diagnosed with this negative operating cash flow anomaly include Bear Stearns, Merrill Lynch and Lehman Brothers.  Here is the typical script:   

1.                  Company utilizes archaic SEC accrual accounting standards to report growing cashless earnings.
2.                  Wall Street analysts recommend shares based on earnings growth.

3.                  Wall Street investment bankers who are affiliated with analysts raise capital for company to generate commissions.

4.                  Commercial banks and suppliers provide loans and credit lines based on the increased equity.

5.                  After the company maximizes its ability to raise additional debt and equity capital revenue growth flattens.

6.                  Company sells inventory at losses and creates declining revenue and EPS losses.

7.                  Company loses option to sell or issue equity to raise capital due to both fundamentals and share price momentum turning negative.  Also loses ability to increase borrowings.

8.                  Company’s fundamentals and share price continue in downward spiral as it liquidates inventory at declining prices to raise cash.

9.                  Company has no choice but to file for bankruptcy since it has debt and can not raise cash.

Titan was first diagnosed as having The EPS Syndrome on September 8, 2011 at a price of $26.41.  Its among several institutionally held public companies who have Wall Street analyst Buy Ratings that has diagnosed with extreme or severe cases of The EPS Syndrome or cashless earnings. 

There have been 93 companies diagnosed with The EPS Syndrome during 2013 and more than 2,500 since 2002.  The share prices of approximately 70% of the companies diagnosed are below their diagnosis price.  Share prices have fallen by at least 50% for half of those companies that have been diagnosed as having the EPS Syndrome.  A four minute video that explains The EPS Syndrome is available.

Equities Research Gets Recognized For Titan Machinery Warning

Yesterday Titan Machinery (NASDAQ: TITN) reported 3rd quarter financials for the period ending October 31,2013.
Titan traded over 3 million shares and closed below $15 for the first time since August 2010 and was a top ten loser on NASDAQ.

Wednesday, December 4, 2013

Greg Harmon Technical Chart of Titan Machinery

This afternoon Greg Harmon of DragonFly Capital shared a technical chart of Titan Machinery (NASDAQ: TITN) on StockTwits .

Bloomberg TV looks at Equity Crowdfunding

This morning on Bloomberg Television Market Surveillance, Tom Keene interviewed Indiegogo co-founder Slava Rubin to discuss how Equity Crowdfunding will be the New Economy. Rubin suggests that Crowdfunding will be disruptive to Venture Capital because "the gatekeeper will no longer control who gets money."

Equities Research Archives Discussing Crowdfunding



Tuesday, December 3, 2013

Warning: Titan Machinery Reports Thursday Pre-Market

On Thursday morning Titan Machinery (NASDAQ: TITN) will report 3rd quarter financials for the period ending October 31,2013.  Equities Research continues to remain bearish on Titan Machinery and believes share are headed to single digits.

Shares of Titan today are trading @ $16.65 down nearly 5% on the day.

Titan was the top short pick in the Equities Research February 2013 Newsletter when it was trading above $32. YTD chart below from  Russell 2000 index vs.TITN

Equities Research Archives on Titan Machinery