AGCO AGCO Corp

Titan Machinery (TITN) announced first quarter results Thursday morning that caught Wall Street by surprise. The retail outlet for farm and construction equipment, increased year-over-year revenues by 55% to $318 million, while EPS jumped over four-fold to $0.40. Analysts were expecting revenues of $260.5 million and EPS of $0.22.

The company also gave a brighter outlook for the coming quarters, raising full year revenue guidance to a range of $1.31-1.385 billion from $1.275-1.35 billion, and boosting net income projections to a range of $1.53-1.63 EPS from $1.50-1.60. The earnings beat and the bump in guidance took TITN shares up over 7% in Thursday morning trade.

How Did the Street Miss This Story?

Titan became a Zacks #1 Rank (strong buy) stock on April 6 as analysts began raising estimates following the company’s fourth quarter report. Full year EPS consensus projections reached $1.61 over a month ago, but then started to drop the closer we came to this first quarter report, hitting $1.48 this week.

This caused the Zacks Rank to drop to a #3 (hold) on June 3 because our quantitative model relies so heavily on analyst estimates to gauge the earnings momentum trend. Clearly, the analysts were not expecting a blow-out number and this was reflected in the milder Zacks Rank. But the stage was still set for a surprise because of the earlier #1 Rank and an understanding that the Zacks Rank can fall when old data drops out of the 60-day window used.

The key take away here is that stocks with a Zacks Rank of #1 or #2, as TITN had consistently been since December of last year, have a high probability of being companies that will report positive earnings surprises. This is true, and proven by the data, because the Zacks Rank stock rating system emphasizes the trend and momentum of earnings estimate revisions, and thus tends to be predictive of stock prices, upward revisions, and upgrades even when analysts may be cautious or late.

Three Fundamental Indicators

Titan is only a $500 million market cap company and not exactly a broad barometer for the agricultural markets. The April breakout to new highs above $28 turned into May selling as the analysts estimates fell. But those who followed the Zacks Rank and bought or held into that dip to $25 before earnings were rewarded Thursday with the pop back above $29.

Where else could one have looked for clues about the market for its inventory and rentals of the Case and New Holland brands of agriculture and construction equipment? Industry strength could be seen in a few different ways and I will list three, in order of importance from the most data-driven and reliable to the most anecdotal.

First, the profit picture for the manufacturers of farm machinery has been on fire. Deere (DE) has been a leader for over a year, but currently topping the list of Zacks #1 Rank stocks in this industry are AGCO Corp. (AGCO) and CNH Global (CNH), the parent company which owns the Case and New Holland brands. Even engine manufacturer Briggs & Stratton (BGG) carries a #1 Rank, boosting this industry group of seven names to a number 5 out of 265.

Second, the main driver of strong profits from these companies is rising grain demand and prices, in addition to revenue growth from their construction equipment divisions. And the trend of higher grain prices looks poised to continue after today's government report indicating supplies will get tighter as new planting will not meet demand.

Third, I attended the World Agricultural Investment Conference in Chicago in early May and was the beneficiary of many hours of excellent presentations by leading agricultural economists and investors. One thing that stood out was the surge of Private Equity interest in this space. Here's what I wrote for TheStreet.com on May 10:

"The investible agribusiness universe is estimated to be between $600 billion and $2.2 trillion, depending on how you slice the criteria for inclusion (e.g., what percentage of a company's revenues come directly from ag-related activities). And much of the serious investing that's going on is being done through Private Equity (PE), not public companies.

Bill Goodbar, Managing Director of Agricapital Corporation, noted in his presentation that 63 new PE firms are looking to raise over $13 billion for new investments, both domestic and abroad. This money will pour into farming land, corporate farm development, infrastructure, transportation, chemicals, seeds, and biotechnology, water use and irrigation, machinery, processors, grocers, a dozen other logistical points in the supply chains."

NetJets for Farmers

A final anecdote brings us full circle back to Titan because of one very interesting PE investment revealed by Goodbar. A private company called MachineryLink is the so-called "NetJets for farmers" as it serves the needs of those who would rather rent a very expensive combine, for instance, than buy one.

At the time, I found this very intriguing because I had just discovered Titan and the Zacks Rank stock rating system. I admit I have a bias toward investing in global megatrends like energy and agricultural that are driven by emerging markets demand growth.

But now I have a strong fundamental system for evaluating the stock investing opportunities within these megatrends so that I am not blindly following long-term dreams. Because when it comes down to it, the most powerful force affecting stock prices is still earnings and corresponding analyst estimate revisions, not mere tales of hope and progress.

Kevin Cook is a Senior Stock Strategist for Zacks.com

 
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