TWI - Titan International: Market Conditions Are Improving But It Would Be Wise To Wait

2023-11-24 04:06:30 ET

Summary

• Titan International's stock price has recovered, but has yet to fully recover from market conditions deteriorating.
• The company's Q3 FY23 net sales declined by 24.3% compared to the previous year, with all segments underperforming.
• The company may struggle in the upcoming quarter due to ongoing destocking issues and high interest rates, but there are signs of recovery for 2024.

Titan International ( TWI ) sells tires and undercarriage products. I wrote on TWI in March and assigned a buy rating on it. But the market conditions deteriorated, and as a result, its stock price was down about 28% at one point, but the stock has recovered quite well in recent times and is now at the same level as it was in March. The market conditions have improved, but it has yet to recover fully. Hence, I am changing my rating to a hold from a buy.

Financial Analysis

It recently announced its Q3 FY23 results . The net sales for Q3 FY23 were $401.7 million, a decline of 24.3% compared to Q3 FY22. All three of its segments underperformed, which led to a sales decline. The sales from its Agricultural, Earthmoving/Construction, and Consumer Segments declined by 26.3%, 22.4%, and 18.7% in Q3 FY23 compared to Q3 FY22. The major reason behind the underperformance in all three segments was inventory destocking by its OEM customers and a weak economy in Brazil. The gross margin was almost unchanged. It was 16.4% in Q3 FY23, which was 16.5% in Q3 FY22.

The net income for Q3 FY23 was $19.6 million, which was $42.7 million in Q3 FY22. Besides lower sales, Employee-related inflationary costs also adversely affected the company's profitability. The sales and profitability declined significantly, and it was expected as the company has been facing quite a lot of issues in FY23, like inventory destocking and high-interest rates across the Americas and Europe, and comparison with FY22 financials became difficult because it was their best financial year in the last ten years. Now, talking about the headwinds, the management expects that the destocking issue might continue to hamper its sales in the upcoming quarter, and the interest rates are still high, mainly in Brazil. So, TWI might struggle in the coming quarter, and we might not see growth in sales. However, some signs of recovery and positives show that the company might perform better in 2024. The interest rates, especially in Brazil , have seen a drop in recent times; although it is still higher than the historical averages, the current rates are lower than what they were in the first half of 2023, and the management expects inventory destocking might start to abate in 2024. So, there are chances that the company might perform better in 2024, but in the near term, the growth outlook isn't positive.

Technical Analysis

It is trading at $13.4. I covered it in March, and since then, the stock started to fall, but it took support from its 200 ema, and after touching it, the stock price recovered quite well. Now, the stock is at the same level as it was in March. The current level is important for the stock because the stock is near the breakout level of $13.7. If the stock gives a closing above $13.7, then we might see a fresh upward momentum in the stock, but if it fails to break to the $13.7 level in the near term, it might fall up to its 200 ema, which is around $11. So, I believe one should wait for the breakout to happen, and when it does, one can enter the stock, but if the breakout doesn’t happen, then it would be wise to avoid it.

Should One Invest In TWI?

The company performed well in FY22, and I assigned a buy rating, but despite performing well, its share price started to fall because of uncertainty in the market. But now, despite of struggling, its stock price has risen more than 15% in the last 20 days. I think the reason for the move in the stock price is because of a better outlook and expectations for FY24. I agree the situation is better now than it was two quarters ago, but still, the conditions aren’t fully favorable, and it might take some more time to recover. Hence, I think it would be better to avoid it now and wait till the market conditions recover fully. Hence, I am changing my rating to a hold from a buy.

Risk

The Company manufactures its goods throughout all of its market categories using various raw materials, the most important of which are steel, carbon black, synthetic and natural rubber, fabric, and bead wire. The Company generally does not use derivative commodities instruments to hedge its exposure to price changes in the commodity market, nor does it enter into long-term commodity contracts. As a result, the Company is vulnerable to changes in the price of important commodities. Additionally, external variables like poor weather make its business vulnerable to rising costs like energy and natural gas prices to run its operating facilities. There is no guarantee that the Company will be able to pass on material price increases and other cost increases to its customers, even though the Company tries to do so. Any increase in the cost of steel and rubber that is not passed along to consumers may cause margins to drop, which would be extremely detrimental to Titan's bottom line and operational outcomes. The business is also vulnerable to price reductions for important commodities, which might lead to dwindling margins because inventory would have to be held at a higher cost than what the final consumer would pay.

Bottom Line

The situation is improving, and the worst seems to be behind us. Still, it would be better to be cautious and wait for more time until the destocking issue is resolved. In addition, the stock price is near the breakout level, and if it fails to sustain this level, then we might see a fall in the share price. Hence, considering these factors, I am changing my rating to hold from buy.

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