Imagine a company — let’s call it A — that significantly depends on company B for revenue, has zero presence outside the U.S. and Europe and has never paid dividends. Perhaps you wouldn’t give A’s stock a second look.
What if I tell you that company B is the world’s second-largest farm-equipment company, next only to Deere & Company (NYSE:DE), and that A is one of its largest dealers in the world? Company A’s case gets considerably stronger.
It gets even better if you know that A’s stock is trading at a compelling 10 times earnings after having shed a massive 36% year to date. Now that looks like a bargain, which is why you should certainly read along.
The big advantage. Or is it?
Image source: CNH Global Case IH website.
Titan Machinery Inc. (NASDAQ:TITN) is the company I am talking about. Nearly 82% of the agricultural equipment and 64% of the construction equipment that Titan Machinery Inc. (NASDAQ:TITN) sold in its financial year ending January 31 came from the CNH Global NV (ADR) (NYSE:CNH) house. Yes, you guessed it: CNH Global NV (ADR) (NYSE:CNH) is next only to Deere & Company (NYSE:DE) when it comes to leadership in the farm-equipment industry.
Naturally, Titan Machinery Inc. (NASDAQ:TITN) has an enviable position as the world’s largest retailer of CNH Global NV (ADR) (NYSE:CNH)’s Case IH agricultural equipment brand and North America’s biggest dealer of Case construction equipment.
Sadly, Titan’s growth story ends there.
No, CNH isn’t enough
By now, you know that Titan Machinery Inc. (NASDAQ:TITN)’s growth largely hinges on CNH’s expansion plans. To that end, CNH has an impressive global presence — Its equipment had reached 170
countries by the end of 2012. Furthermore, 31% of CNH Global NV (ADR) (NYSE:CNH)’s net equipment sales in 2012 came from the region constituting Europe, Africa, Middle East, and Commonwealth of Independent States, 15% came from Latin America, and 10% was attributed to the Asia-Pacific region.
In short, international markets contributed a whopping 56% to CNH Global NV (ADR) (NYSE:CNH)’s total revenue. That’s way ahead of industry leader, Deere & Company (NYSE:DE)’s 36% share of revenue from markets outside the U.S. Only AGCO Corporation (NYSE:AGCO), which is the third in line in the farm-equipment industry, derived nearly three-quarters of its revenue outside the North American market last year.
The problem is that Titan Machinery Inc. (NASDAQ:TITN) has yet to venture outside the U.S. and Europe. So no matter how far CNH spreads its wings, Titan will basically have nothing to gain. That leaves Titan at the mercy of demand for equipment in the U.S. and European regions, which is certainly not the best thing to happen to a company when it has to compete with dealers that stock equipment of stalwarts like Deere & Company (NYSE:DE) and Caterpillar Inc. (NYSE:CAT).
It’s a daunting task ahead
CNH’s scale of business is hard to match up with that of Deere or Caterpillar Inc. (NYSE:CAT). For perspective, Deere & Company (NYSE:DE) generated revenue worth $27 billion
from its agriculture division while Caterpillar Inc. (NYSE:CAT) derived nearly $20 billion in sales from its construction-equipment business in their respective last financial years. CNH Global NV (ADR) (NYSE:CNH)’s total equipment revenue for 2012 was just about $19 billion.
Both Deere & Company (NYSE:DE) and Caterpillar are also known for their strong research and development initiatives to regularly roll out innovative and advanced machines. While they spent 4.3% and 3.7% of net sales, respectively, on R&D last year, CNH kept it relatively low at 3.4% of sales.