Is Titan Machinery the Perfect Stock?

Before you go, we thought you'd like these...
Before you go close icon

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Titan Machinery (NAS: TITN) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Titan Machinery.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

39.5%

Pass

 

1-Year Revenue Growth > 12%

46.3%

Pass

Margins

Gross Margin > 35%

16.3%

Fail

 

Net Margin > 15%

2.4%

Fail

Balance Sheet

Debt to Equity < 50%

174.5%

Fail

 

Current Ratio > 1.3

1.38

Pass

Opportunities

Return on Equity > 15%

12.7%

Fail

Valuation

Normalized P/E < 20

12.11

Pass

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

 

 

 

 

 

Total Score

 

4 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

With four points, Titan Machinery has a lot of room for improvement. The construction equipment seller has posted amazing growth in recent years, but thin margins have kept it from turning those sales into higher profits.

Titan Machinery is a retailer that specializes in agricultural equipment. With the farming industry enjoying high prices, boom times have given farmers more money to spend. That's been good news not only for big agricultural stocks like equipment maker Deere (NYS: DE) and seed-seller Monsanto (NYS: MON) but also for companies like Titan that actually sell farmers the goods they need.

Moreover, Titan has succeeded in the U.S. market, which has left many of its competitors reeling. Caterpillar (NYS: CAT) , for example, has seen huge growth in its Asia/Pacific sales, but U.S. revenue has fallen by a quarter in the past four years. By contrast, Titan sales in the U.S. have nearly quadrupled.

Titan's stock, however, hasn't always responded to its success the way you might expect. Yesterday, for instance, Titan shares fell as much as 16% intraday even after the company reported better-than-expected 48% revenue growth, earnings per share that doubled year-ago levels, and improved guidance for the rest of 2011.

With no dividend, a debt-heavy balance sheet, and low retail margins, Titan has plenty of work to do to improve itself. If agriculture continues to boom, however, Titan could make a lot of progress toward perfection in the years to come.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Titan Machinery to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our 13 Steps to Investing Foolishly.

At the time this article was published

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story

Want more news like this?

Sign up for Finance Report by AOL and get everything from business news to personal finance tips delivered directly to your inbox daily!

Subscribe to our other newsletters

Emails may offer personalized content or ads. Learn more. You may unsubscribe any time.

From Our Partners