Titan Results Shine Light on Machinery Sector Problems (TITN, DE, CNH, AGCO, CAT, JOY)

Farm equipment and machinery retailer Titan Machinery Inc. (NASDAQ: TITN) this morning reported second-quarter earnings per share (EPS) of $0.25 on revenue of $410 million before markets opened. In the same period a year ago, the company reported EPS of $0.30 on revenue of $310.8 million. Second-quarter results also compare to the Thomson Reuters consensus estimates for EPS of $0.43 and $402 million in revenue.

The company reiterated revenue guidance of $1.95 to $2.1 billion, compared with the consensus estimate of $2.02 billion. EPS guidance was lowered significantly, from a consensus estimate of $2.64 to a range of $2.10 to $2.30.

The company’s chairman and CEO said:

Even though our agriculture customers experienced strengthening commodity prices midway through our second quarter, severe drought conditions in the Midwest negatively impacted customer sentiment and associated equipment margins. Construction equipment margins were also pressured by competitive conditions particularly in some of the larger metro areas of recent acquisitions. These factors generated a competitive retail equipment market where we were able to maintain sales activity but experienced a compression in our overall equipment margins and in particular our used equipment margins. As a result, we are reiterating our annual revenue guidance but lowering annual net income and earnings per share outlook.

The margin compression experienced by Titan could be a threat to the entire farm equipment and machinery sector, including Deere & Co. (NYSE: DE), CNH Global N.V. (NYSE: CNH), and Agco Corp. (NYSE: AGCO). Heavy equipment makers Caterpillar Inc. (NYSE: CAT) and Joy Global Inc. (NYSE: JOY), which are less dependent on farm equipment, may also get caught in the downdraft.

Titan’s gross margins totaled 17.2% in the second quarter, down from 18% in the same period a year ago. The company blamed the drop on lower prices for used equipment in a tougher pricing environment and a change in sales mix, which declined in Titan’s high margin parts and services divisions.

The company’s shares are down 19% at $20.55 in a 52-week range of $15.58 to $36.92.

Shares of CNH Global, for which Titan is the world’s largest retailer of ag equipment, are down about 1% at $41.84 in a 52-week range of $22.19 to $57.74.

Deere’s shares are off about 0.7% at $77.70 in a 52-week range of $59.92 to $89.70.

Agco’s shares are down 0.5% at $43.66 in a 52-week range of $30.11 to $54.00.

Paul Ausick