The stock of Titan Machinery (NAS:TITN, 30-year Financials) appears to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus’ estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $32.21 per share and the market cap of $725.4 million, Titan Machinery stock appears to be significantly overvalued. GF Value for Titan Machinery is shown in the chart below.
Because Titan Machinery is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 4.9% over the past five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Titan Machinery has a cash-to-debt ratio of 0.28, which is worse than 71% of the companies in Industrial Distribution industry. GuruFocus ranks the overall financial strength of Titan Machinery at 5 out of 10, which indicates that the financial strength of Titan Machinery is fair. This is the debt and cash of Titan Machinery over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Titan Machinery has been profitable 6 over the past 10 years. Over the past twelve months, the company had a revenue of $1.5 billion and earnings of $1.22 a share. Its operating margin is 3.38%, which ranks in the middle range of the companies in Industrial Distribution industry. Overall, the profitability of Titan Machinery is ranked 5 out of 10, which indicates fair profitability. This is the revenue and net income of Titan Machinery over the past years:
Growth is probably one of the most important factors in the valuation of a company. GuruFocus’ research has found that growth is closely correlated with the long-term performance of a company’s stock. If a company’s business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Likewise, if a company’s revenue and earnings are declining, the value of the company will decrease. Titan Machinery’s 3-year average revenue growth rate is in the middle range of the companies in Industrial Distribution industry. Titan Machinery’s 3-year average EBITDA growth rate is 29.5%, which ranks better than 89% of the companies in Industrial Distribution industry.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Titan Machinery’s return on invested capital is 4.28, and its cost of capital is 8.14. The historical ROIC vs WACC comparison of Titan Machinery is shown below:
In closing, The stock of Titan Machinery (NAS:TITN, 30-year Financials) is believed to be significantly overvalued. The company’s financial condition is fair and its profitability is fair. Its growth ranks better than 89% of the companies in Industrial Distribution industry. To learn more about Titan Machinery stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.