This Shunned Stock Could Rally 60% in the New Year
While most companies will have plenty to cheer these holidays, as their stock prices soared in 2013, some companies would just as soon turn the page and focus on the new year.
Companies operating in the mining industry certainly fall into the latter category. This sector hasn't suffered such tough times in several years. The sharp drop in commodity prices led to the rapid slump in demand for all kinds of mining equipment.
Mining is a highly cyclical business, and though investors have been shunning mining stocks in 2013, signs of stabilization should boost them in 2014, especially as the outlook for better days ahead comes into focus.
And when that happens, investors will focus on the companies with a great deal of leverage. It helps if these companies have a wide moat around their business, i.e., a significant competitive advantage that is extremely difficult to copy or emulate, thereby creating a barrier to entry for competing firms. This implies that they will have full pricing power when business conditions improve.
Titan International (TWI) fits this bill. The company makes huge truck tires used by massive mining trucks, agricultural equipment and other off-road mega-vehicles. TWI will never enjoy the benefits of the huge market for cars and small trucks, but its niche yields large prices and impressive profit margins. For example, TWI generated 9.6% operating margins in 2012, while Goodyear Tire (GT) has not exceeded 3% operating margins in the past decade.
But for investors, 2012 is a long time ago. In 2013, TWI was hit with a double whammy. Not only has demand slowed for big tires, but key customers overbought last winter and ended up unloading many nearly new tires onto the market. And that has led organic revenue growth to falter. (A few acquisitions in 2012 and 2013 are enabling TWI to still post modest top-line gains.)
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More importantly, profits are getting crushed. TWI has missed profit forecasts by at least 40% in three of past four quarters, and per-share profits are on track to fall by nearly half this year, to $0.94 a share
The process of clearing the glut of tires from the market is hurting results now, but should help stabilize results in 2014. Analysts currently expect sales to grow around 5% in 2014 to around $2.3 billion, and per-share profits to rise roughly 19% to $1.09.
But management thinks that analysts, having been burned on several occasions this year, have become too conservative. In late November, TWI issued a press release predicting 2014 sales of at least $2.4 billion, and perhaps as high as $2.7 billion. And that assumes no new acquisitions.