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Titan Intl (TWI), an agricultural and construction OEM parts manufacturer, is a small-cap stock potentially at the latter half of the many obstacles it endured this year. The beginning of 2023 saw intensifying Ag and construction dealer inventory destocking, when dealers offload more equipment than they replace from OEMs, denting investor sentiment.

However, over the past few months, companies operating in the farming and construction markets, such as giants Deere (DE) and Caterpillar (CAT), have noticed improving dynamics; TWI agrees. Even more significant, the consensus is that 2024 will mark a return to normal market conditions, making TWI's current pullback on the year an attractive entry point, especially when considering its current valuation, carrying forward earnings and sales multiples of 7.7x and 0.4x, respectively, placing it a #27 in our most recent Value Leaders Rankings.

TWI specializes in manufacturing wheels, tires, and other components, such as undercarriage systems, for agricultural, earthmoving, and other construction equipment across North America, Europe, Latin America, and Russia. Its biggest segment is Agricultural, comprising 55% of FY22 revs, while Earthmoving/Construction is its next largest at 37%. Its lightest business encompasses sales directly to consumers in Latin America and Russia, including tires for trucks and ATVs, totaling just 8% of FY22 revenue.

What makes now an appealing time to buy?

• The theme TWI carried throughout its Q3 earnings call earlier this month was a concluding dealer destocking dynamic that weighed on results throughout the year. Management was optimistic that because this trend appears as though it is nearly complete, it can enter 2024 operating in a relatively normal market.
  • CAT shared a similar sentiment last month, repeatedly expressing its bullishness toward 2024, citing improving supply conditions assisting normalizing lead times, allowing the company to work through a higher-than-normal backlog.
• TWI discussed several other favorable factors contributing to its upbeat view of next year and beyond. For one, farmer incomes are healthy, an attribute DE touched on in August, supporting a sturdy demand picture in large Ag, a meaningful component of TWI's overall business. At the same time, the average age of Ag and construction fleets is above historical averages, creating an impending tailwind as customers have no choice but to upgrade their equipment.
  • DE has talked about an aging fleet for years, so this trend could take some time before it becomes a major tailwind. Nonetheless, DE did note that it has been making progress in bringing down the average age of its fleet and is expecting to make further progress in 2024. However, it stated that it will still be above historical averages.
• Another encouraging development was the stabilizing market conditions within TWI's small OEM Ag business after a tumultuous year filled with decreasing volumes as the smaller farmer dealt with elevated interest rates and inflation. TWI mentioned that excess dealer inventories in this segment are subsiding and expects the business to rebound in 2024.

While challenges have not wholly run their course, TWI is likely on the other side of the adversity it faced over the past year. Shares have already run nearly +20% since TWI's Q3 report on November 1 but are still down roughly 10% on the year. With 2024 turning into a rebound year, we think current levels offer a compelling entry for exposure to the improving Ag and construction markets.